Court Opinion

ID: 9919952
Source: CourtListenerOpinion
Date Created: 2024-01-18 23:01:57.65291+00
Date Added: 2024-06-11T08:21:59.014068
License: Public Domain

Filed 1/18/24 (unmodified opn. attached)
                        CERTIFIED FOR PUBLICATION

      IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                           FIRST APPELLATE DISTRICT

                                    DIVISION FOUR

 THE PEP BOYS — MANNY,
 MOE & JACK et al.,
         Plaintiffs and                        A166574
         Appellants,
                                               (San Francisco City & County
 v.                                            Super. Ct. No. CGC-21-
 OLD REPUBLIC INSURANCE                        590238)
 COMPANY et al.,
                                               ORDER MODIFYING
         Defendants and                        OPINION; NO CHANGE IN
         Respondents.                          JUDGMENT

THE COURT:

      It is ordered that the opinion filed herein on December 28, 2023, be
modified as follows:

1.      On page 1, the first sentence, “The Pep Boys — Manny, Moe & Jack
        and The Pep Boys Manny Moe & Jack of California LLC (together,
        Pep Boys) appeal from the trial court’s judgment against them in a
        coverage action against their insurers, Old Republic Insurance
        Company (Old Republic); Executive Risk Indemnity Company,
        formerly known as American Excess Insurance Company (American
        Excess); and Fireman’s Fund Insurance Company (Fireman’s
        Fund).” is changed to:

                 “The Pep Boys — Manny, Moe & Jack and The Pep Boys
                 Manny Moe & Jack of California LLC (together, Pep Boys)
                 appeal from the trial court’s judgment against them in a
                 coverage action against their insurers, Old Republic Insurance
                 Company (Old Republic); Executive Risk Indemnity
                 Company, as successor to certain insurance contracts issued

                                           1
               by American Excess Insurance Company (American Excess);
               and Fireman’s Fund Insurance Company (Fireman’s Fund).”

        The listing of counsel will be corrected separately by clerical action.

        There is no change in judgment.

Date:      1/18/2024                                        J. Brown       P. J.

                                       2
Filed 12/28/23 (unmodified opinion)
                  CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                     FIRST APPELLATE DISTRICT

                              DIVISION FOUR

 THE PEP BOYS MANNY
 MOE & JACK OF
 CALIFORNIA et al.,                       A166574
        Plaintiffs and
        Appellants,                       (San Francisco County
                                          Super. Ct. No. CGC-21-
 v.                                       590238)
 OLD REPUBLIC
 INSURANCE COMPANY et
 al.,
        Defendants and
        Respondents.

       The Pep Boys — Manny, Moe & Jack and The Pep Boys
Manny Moe & Jack of California LLC (together, Pep Boys) appeal
from the trial court’s judgment against them in a coverage action
against their insurers, Old Republic Insurance Company (Old
Republic); Executive Risk Indemnity Company, formerly known
as American Excess Insurance Company (American Excess); and
Fireman’s Fund Insurance Company (Fireman’s Fund). We agree
with Pep Boys that the language of their policies with Old
Republic and Fireman’s Fund, which were for terms longer than
12 months, dictates that the policies contained two separate
annual periods for the purposes of the annual aggregate limits of

                                      1
liability. But we agree with the trial court that the American
Excess policy, which had different language, had only one period
for purposes of that policy’s annual aggregate limits. We will
therefore reverse the trial court’s judgment in part.
                        BACKGROUND
      Pep Boys sells automotive products at its stores
nationwide, with over 145 stores in California. Hundreds of
people, including more than 500 in California, filed claims
against Pep Boys alleging harm from exposure to asbestos in
products Pep Boys sold. In 2004, Pep Boys sought coverage for
hundreds of these claims from insurers who sold a “tower” of
commercial general liability policies providing coverage between
February 1, 1981, and July 1, 1982.
      At the base of the tower, Protective National Insurance
Company of Omaha (Protective), provided primary coverage. The
policy originally covered from February 1, 1981, to February 1,
1982, up to a limit of $500,000 per occurrence and $500,000 in
the aggregate “during each annual period while this policy is in
force commencing from its effective date.” Protective later
extended the policy period by endorsement to June 30, 1982, in
exchange for an additional prorated premium.
      New England Reinsurance Corporation (New England)
provided the first layer of umbrella coverage. New England’s
policy initially covered from February 1, 1981, to June 30, 1982,
up to a limit of $10,000 per occurrence and $10 million “in the
aggregate for each annual period.” The policy described its
aggregate limit as an “annual aggregate limit . . . on account of

                                 2
all occurrences during each policy year . . . .” (Capitalization
omitted.) In exchange for an additional prorated premium, New
England later extended its policy to July 1, 1982.
        Old Republic and American Excess shared the second layer
of excess coverage. As originally written, the Old Republic policy
covered the period from February 1, 1981, to June 30, 1982. It
provided excess coverage up to $10 million per occurrence and
$10 million “in the aggregate for each annual period during the
currency of this policy.” A letter from Pep Boys’ broker
submitting the application for the insurance said that Pep Boys
wanted the policy to cover 17 months to “get [its] insurance
program concurrent with [its] fiscal year end accounting.” The
broker calculated the premium due for the 17 months by
prorating the 12-month premium. The premium Old Republic
charged was consistent with the broker’s calculation. Old
Republic later extended the policy period by one day to July 1,
1982, for an additional prorated premium.
        American Excess issued the other policy in the second
layer, and it originally covered from February 1, 1981, to
February 1, 1982. The policy states that American Excess’s
liability would be “limited, where and as applicable, to the
amount stated” in the declarations as the insurer’s “ ‘aggregate’
with respect to loss excess of the Underlying Insurance which
occurs during the term of this Certificate,” which was $5 million.
An endorsement later extended the policy to July 1, 1982, for $11,
which was one day’s prorated premium.1 This endorsement also

        1
          The obvious implication of this one-day endorsement to July 1, 1981, is that there was a
previous endorsement that extended the term from February 1 to June 30, 1982. The record does

                                                3
states that “the total premium is amended to $5,171.00 and the
total annual premiums [remain] $3,665.00.”
         Fireman’s Fund participated in the third and final layer of
excess coverage. Its policy covered from April 3, 1981, to July 1,
1982. It covered up to $15 million per occurrence and $15 million
aggregate “for all damages sustained during each annual period
of this policy” as part of a total third layer of $25 million.
Another insurance company that is now insolvent provided the
balance of coverage in the third layer.
         After Pep Boys demanded coverage, Protective became
insolvent and went into receivership. But it agreed to provide
two $500,000 aggregate limits payments, one for the period from
February 1, 1981, to February 1, 1982, and a second for the
period from February 1, 1982, to June 30, 1982.
         Although it had taken the position that Protective owed
two aggregate limits payments, New England nonetheless
asserted that its own policy provided only one aggregate annual
limit. Accordingly, after New England paid $10 million, it
notified Pep Boys that its policy was exhausted. Old Republic,
American Excess, and Fireman’s Fund took the same position
regarding their respective policies. Pep Boys therefore filed a
declaratory judgment action against all four insurers, seeking a
ruling that each policy provided two aggregate annual limits, one
for the first 12 months of the policies and one for the remaining
period.

not contain a copy of this endorsement, but nothing turns on its language so the omission is not
significant.

                                                 4
      Pep Boys moved for summary adjudication of these
coverage issues as to each insurer. Fireman’s Fund cross-moved
for summary judgment, arguing that Pennsylvania law governed
the interpretation of the policy and under Pennsylvania law all of
the claims against Pep Boys arose from one occurrence.
According to Fireman’s Fund, the per occurrence limit in its
policy therefore capped Fireman’s Fund’s liability at $15 million,
regardless of how the court construed the aggregate limits
provision.
      Pep Boys reached a settlement with New England and
dismissed it before the hearing on the motions.
      The trial court denied Pep Boys’ motion, ruling that the
policies of Old Republic, American Excess, and Fireman’s Fund
each provided only a single aggregate limit. The court denied
Fireman’s Fund’s motion as moot. The parties agreed that the
court’s ruling fully disposed of Pep Boys’ claims, so they
stipulated to entry of judgment.
                          DISCUSSION
      A party is entitled to summary adjudication if there is no
triable issue as to any material fact and the matter can be
adjudicated as a matter of law. (London Market Insurers v.
Superior Court (2007) 146 Cal.App.4th 648, 655.) “On appeal, we
independently review the trial court’s ruling and apply the same
legal standard that governs the trial court.” (Ibid.) The trial
court’s reasons for its ruling “are not binding on us because we
review its ruling, not its rationale.” (Ram’s Gate Winery, LLC v.
Roche (2015) 235 Cal.App.4th 1071, 1079.) We “must affirm on

                                   5
any ground supported by the record.” (Jimenez v. County of Los
Angeles (2005) 130 Cal.App.4th 133, 140.)
      “ ‘ “While insurance contracts have special features, they
are still contracts to which the ordinary rules of contractual
interpretation apply.” [Citations.] “The fundamental goal of
contractual interpretation is to give effect to the mutual intention
of the parties.” [Citation.] “Such intent is to be inferred, if
possible, solely from the written provisions of the contract.”
[Citation.] “If contractual language is clear and explicit, it
governs.” [Citation.]’ [Citation.]
      “ ‘ “A policy provision will be considered ambiguous when it
is capable of two or more constructions, both of which are
reasonable.” [Citations.] . . . “ ‘[L]anguage 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.’ ” [Citation.] “If an asserted ambiguity is not
eliminated by the language and context of the policy, courts then
invoke the principle that ambiguities are generally construed
against the party who caused the uncertainty to exist (i.e., the
insurer) in order to protect the insured’s reasonable expectation
of coverage.” [Citation.]’ [Citation.] [¶] . . . [S]tandard form policy
provisions are interpreted under the same rules of construction.
‘ “[W]hen they are examined solely on a form, i.e., apart from any
actual agreement between a given insurer and a given insured,
the rules stated above apply mutatis mutandis. That is to say,
where it is clear, the language must be read accordingly, and
where it is not, in the sense that satisfies the hypothetical

                                     6
insured’s objectively reasonable expectations.” ’ ” (Powerine Oil
Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 390–391
(Powerine Oil).)
      Because the language of each of the policies at issue is
different, we examine the policies each individually.
  a. Old Republic
       I.Policy language
      Old Republic’s policy establishes the benefits limit as $10
million “ultimate net loss in all in respect of each occurrence
subject to a limit of” $10 million “in the aggregate for each annual
period during the currency of this policy.” The term of the policy
is 17 months, from February 1, 1981, to July 1, 1982. There is no
question that Old Republic must pay up to $10 million for the
first 12 months of the term. The parties disagree over how to
apply the reference to “each annual period” to the remaining five
months in the policy term. Old Republic treats “annual period”
as applying to the entire 17-month term of the policy, such that
the policy provides a total of $10 million of benefits, while Pep
Boys reads the policy term as consisting of two annual periods,
one for the first 12 months and the second for the remaining 5
months, so that the policy provides a total of $20 million of
benefits.
      The policy language cannot be applied literally as written.
“Annual” as a modifier of “period” means “covering the period of a
year.” (Merriam-Webster Dict. Online (2023)
<https://www.merriam-webster.com/dictionary/annual> [as of
December 28, 2023].) Both parties ask us to apply “annual

                                  7
period” to terms more than or less than a year: 17 months, in Old
Republic’s view, or 5 months, under Pep Boys’ approach. As a
textual matter, neither reading accords with the literal meaning
of “annual,” and neither is more reasonable than the other.
      We turn next to the limited extrinsic evidence that the
parties have provided, to determine whether the circumstances of
this case clarify the matter. (See Powerine Oil, supra, 37 Cal.4th
at p. 391.) According to the letter from its broker to Old
Republic’s representative, Pep Boys wanted a 17-month policy
because it wanted to align the expiration of its insurance policies
with its fiscal year. Nowhere is there any suggestion in the letter
that Pep Boys wanted to reduce the costs for its insurance or
make any changes to the level of its coverage. Pep Boys’ desire
merely to extend its insurance, rather than reduce its scope or
expense, together with the fact that Pep Boys paid a prorated
premium, suggests it intended to receive the same level of
coverage as it had been, rather than diluting it. This evidence
persuades us that Pep Boys intended to receive $10 million in
protection during the last 5 months of the term just as it had for
the first 12 months.
      Old Republic’s approach, by contrast, dilutes Pep Boys’
coverage by spreading the same aggregate limit over 17 months.
This might be reasonable if the extrinsic evidence showed that
Pep Boys wanted to reduce its coverage or reduce costs. Of
course, in such a scenario one would also expect the amount of
the premium for the extension to be something less than a simple
proration, given that the increased time on the risk would not

                                 8
increase the insurer’s maximum exposure. (Board of Trustees of
University of Illinois v. Insurance Corp. of Ireland, Ltd. (N.D.Ill.
1990) 750 F.Supp. 1375, 1383–1384 [discussing premiums
insurers would be expected to charge for different lengths and
limits of policies], affd. (7th Cir. 1992) 969 F.2d 329.) But since
Pep Boys merely intended to extend the date of a policy for
administrative convenience and paid a straight prorated
premium to do so, it is not reasonable to reduce the amount of
Pep Boys’ benefits.
      This extrinsic evidence may not be definitive, but any
remaining ambiguity must be construed against Old Republic as
the party who caused the uncertainty and in favor of Pep Boys’
reasonable coverage expectations. (Powerine Oil, supra,
37 Cal.4th at p. 391 [“ ‘ “ambiguities are generally construed
against the party who caused the uncertainty to exist (i.e., the
insurer) in order to protect the insured’s reasonable expectation
of coverage” ’ ”].) Reading the policy as containing two aggregate
limits periods is consistent with Pep Boys’ reasonable coverage
expectations.
      Old Republic’s interpretation, by contrast, would be
surprising, both to Pep Boys and to any other insured who bought
such an insurance policy for a period between one and two years.
In Old Republic’s view, the “annual period” clause was intended
to make sure that no new aggregate limit would apply to a period
of less than one year. In effect, this means that an insured
buying or extending a policy for 1 year and 364 days in exchange
for a prorated annual premium — which would be almost exactly

                                  9
double the premium for a single year — would have one year’s
aggregate limit diluted over 1 year and 364 days, thereby
receiving, in effect, half the benefits than if it had purchased two
full-year policies for almost the same amount of money. No one
would expect this result. If Old Republic intended its policy to
operate in this fashion, either for Pep Boys or any other insured,
it should have written its policy or fashioned an endorsement
that made it clear. It failed to do so and must now abide by the
policy it wrote.2
        We recognize that our consideration of Pep Boys’
expectations for its insurance coverage is artificially constrained
because Pep Boys only seeks a ruling on its insurance policies
covering some or all of the period between February 1981 and
July 1, 1982. Pep Boys has not provided any indication of
whether it had insurance for the remainder of 1982, or the
coverage or limits of such insurance. If Pep Boys did obtain
insurance for a period following July 1, 1982, and that insurance
covered asbestos claims, our interpretation of Old Republic’s
policy as providing a full aggregate limits benefit during the
period from March 1 to July 1, 1982, could lead to Pep Boys
receiving more coverage than it expected for the calendar year of
1982. Conversely, however, adopting Old Republic’s
interpretation could lead to Pep Boys effectively having a gap in
coverage. “Neither result seems wholly fair, but it is not clear
that there is a wholly fair result that is possible under the

        2
          We note that Protective, Pep Boys’ primary insurer, had policy language similar to Old
Republic’s and made two aggregate limit payments for its policy that was extended from 12 to 17
months.

                                               10
policy’s language.” (Union Carbide Corp. v. Affiliated FM Ins. Co.
(N.Y. 2011) 947 N.E.2d 111, 114; see id. p. 115 [finding that
factual disputes precluded summary judgment regarding amount
of aggregate limits applicable to two-month extension of policy];
but see Stonewall Ins. Co. v. National Gypsum Co. (S.D.N.Y.,
July 29, 1992, No. 86 CIV. 9671 (JSM)) 1992 WL 188433, *1
[giving insured full limits benefit of two separate policies each in
effect for six months of a year arguably gives insured a windfall,
but “it cannot be disputed that each of the insurers is simply
being held to its contract”], affd. in part & revd. in part on other
grounds sub nom. Stonewall Ins. Co. v. Asbestos Claims
Management Corp. (2d Cir. 1995) 73 F.3d 1178 (Stonewall).)
      The most conceptually satisfying resolution of this case
would allow us to avoid incongruous results by considering Pep
Boys’ insurance policies as a whole throughout all periods at
issue in the asbestos claims against it, in the hopes of finding a
resolution that gives Pep Boys the benefits of all of its insurance
policies without gaps or double coverage. Such a theoretically
fair resolution might involve pro rata calculation of limits, to
bridge coverage between different policies.
      However satisfying in theory, such a resolution is
impossible in practice, in this case or any other. Even if Pep Boys
intended to create a cohesive framework of multiple layers of
insurance coverage for all periods of its business operations, we
interpret insurance policies, not multi-year, multi-layer
insurance policy frameworks, and we must apply each policy’s
language as written. Even the few policies at issue here do not

                                 11
line up cleanly, since Old Republic’s and American Excess’s
policies started on February 1, 1981, while Fireman’s Fund’s
policy did not begin until April 3, 1981. And as we determine
post, some policies’ language sets aggregate limits for each
annual period in a policy term or fraction thereof, while other
policies impose one aggregate limit for the entire term of the
policy, even if it stretches beyond a year. Meanwhile, no policy in
this case or any other we have discovered explicitly allows for
proration of policy limits. As a practical matter, then, the
vagaries of the different language and terms of different policies
effectively foreclose any possibility of uniform layers and years of
coverage, and proration cannot solve the issue.
      II.Decisions from other jurisdictions
      While this is, somewhat remarkably, the first case
involving this issue to arise in California, many courts across the
country have previously confronted similar issues. The decisions
on point appear to be roughly evenly split. (See Seaman &
Schulze, Allocation of Losses in Complex Insurance Coverage
Claims (2023) § 8:3 [collecting cases].) The cases congruent with
our analysis of the policy language and circumstances here are
better reasoned and more on point.
      Stonewall, supra, 73 F.3d at pages 1216–1218 considered
three sets of policies. The first two policies established limits “in
the aggregate for each annual period during the currency of this
policy” and did not define “annual period.” (Id. at pp. 1216–
1217.) One of these was an approximately 14-month policy
canceled after about 8 months for a prorated refund of the

                                  12
premium, and the 12-month term of the second policy was
extended for almost 4 more months for an approximately
prorated premium.3 (Ibid.) The appellate court affirmed the
district court’s ruling that full aggregate limits benefits applied to
the shortened term and extension period, respectively. (Ibid.) It
noted that the policies did not address the effect of a fractional
period on the aggregate limits and construed the resulting
ambiguity against the insurers. (Ibid.) The court also noted that
the prorated premiums for the shorter periods were in exchange
for a reduction for the time the insurer was on the risk. (Id. at p.
1217.)
        The insured’s third set of policies were excess policies that
the insured canceled approximately a year and nine months into
their three-year terms and replaced with policies from the same
insurers with higher limits. (Stonewall, supra, 73 F.3d at p.
1217.) The policies stated the aggregate limits applied “for each
annual period where applicable,” with “annual period” defined as
“each consecutive period of one year commencing from the
inception date” of the policies.4 (Ibid.) Stonewall affirmed the
district court’s ruling that the insured intended only to increase
its coverage by replacing the policies, not to obtain separate
coverages, so it did not give the insured the benefit of a separate
aggregate limit benefit during the initial nine-month period
before the cancellations. (Id. at pp. 1217–1218.)

         3
           The premium for the almost four-month extension was about 41% of the full year’s
premium, so the premium charged was actually slightly higher than a strictly prorated amount.
(See Stonewall, supra, 73 F.3d at p. 1217.)
         4
           The first excess policy included this language, and the second incorporated it by
reference. (Stonewall, supra, 73 F.3d at p. 1217.)

                                               13
      Stonewall supports Pep Boys’ argument here, especially
since the operative policy language in the first two policies at
issue there was identical to that of Old Republic’s policy. If Pep
Boys had chosen to align its insurance policies with its fiscal year
by buying two policies for successive one-year terms and
canceling one of them after only five months, or by purchasing a
one-year policy and then paying extra to extend the term by five
months, Stonewall would require Old Republic to provide a full
aggregate limits payment for the fractional period. (Stonewall,
supra, 73 F.3d at pp. 1216–1217; accord, USM v. American Ins.
Co. (N.J.Super.Ct.App.Div. 2002) 792 A.2d 500, 507–508, 518–
525 [following Stonewall; two-week extension of policy created
additional aggregate limit of liability, in part because premium
for extension was prorated]; IMO Industries v. Transamerica
(N.J.Super.Ct.App.Div. 2014) 101 A.3d 1085, 1110 [following
USM v. American Ins. Co.; pro-rating policy limits would reduce
insurer’s risk twice, “once by its time on the risk and a second
time by the pro-rating of the policy limit”]; Board of Trustees of
University of Illinois v. Insurance Corp. of Ireland, Ltd., supra,
750 F.Supp. at p. 1384 [prorated premium for extension of term
supports application of an additional aggregate limit period].)
There is no evident reason to apply “annual period” differently
merely because almost all of the fractional period was included in
the policy term when Pep Boys first bought its policy and paid
the additional prorated premium. Old Republic offers no reason
to treat fractional periods differently depending on whether they

                                 14
arise by cancellation, extension, or creation at the outset, when
the premium is prorated in all three scenarios.
      Stonewall’s affirmance of the lower court’s ruling regarding
the third set of excess policies that the insured replaced with
higher limit policies is not inconsistent with the rest of its
analysis or our analysis here. The touchstone for the
interpretation of ambiguous policies remains the insured’s
reasonable expectations, so providing only one aggregate limit in
such circumstances was reasonable. (Stonewall, supra, 73 F.3d
at pp. 1217–1218.) Because there is no indication that Pep Boys
bought extended policies in order to change the amount of its
coverage, as opposed to obtaining the same amount of coverage
for a new period, it is reasonable to give it the benefit of two full
periods’ worth of aggregate limits.
      Old Republic dismisses Stonewall and IMO Industries
because prorating aggregate limits would have made the per
occurrence limits of the policies larger than the aggregate limits,
which is “logically incoherent.” Another case that Pep Boys cites,
Unigard Sec. Ins. Co. v. North River Ins. Co. (S.D.N.Y. 1991) 762
F.Supp. 566, 595–596, affd. in part & revd. in part on other
grounds (2d Cir. 1993) 4 F.3d 1049, did refuse to prorate
aggregate limits in part because of this interplay between per
occurrence and aggregate limits. But Unigard also noted that
the proration of premiums “reflects the shortened length of time
for which the insurer is exposed to the risk of loss, not a reduced
quantum of protection available if the risk materializes in the
stub period, however short it may be.” (Unigard, at p. 596.) In

                                  15
any event, neither Stonewall nor IMO Industries cited Unigard or
discussed the relationship between per occurrence and aggregate
limits.
         Old Republic also argues Stonewall has no application here
because it did not consider whether a single aggregate limit
should apply to a period of more than 12 but less than 24 months.
This is not correct, since Stonewall applied a full aggregate limit
to the second policy at issue there that was extended to 16
months. (Stonewall, supra, 73 F.3d at p. 1217.) The insurer may
only have advocated for prorating and not for eliminating entirely
the aggregate limit benefit during the extension period, but this
distinction is immaterial. (Ibid.) Stonewall’s denial of an
attempt to prorate the aggregate limit, which would still have
given the insured some additional coverage during the extension,
indicates that it would have rejected an attempt to provide no
additional coverage at all.
         Old Republic cites several decisions from other jurisdictions
that reached different results from those cases cited ante, but
they do not persuade us.5 UNR Industries, Inc. v. Continental
Ins. Co. (N.D.Ill. 1988) 682 F.Supp. 1434, 1457–1459, considered
whether policies issued for a period shorter than one year or
canceled less than one year into a three-year term should have
prorated aggregate limits. The policies declared that their

         5
           Old Republic also cites an unpublished superior court ruling. Rule 8.1115(a) of the
California Rules of Court prohibits citation of unpublished Court of Appeal or superior court
appellate division opinions. Old Republic asserts this does not prohibit citation of superior court
rulings for their persuasive value. This hyper-technical reading of the rule is nonsensical. It
would be absurd to prohibit citation of appellate court rulings, even for their persuasive value, but
permit citation to decisions from trial courts for persuasive value. (See Bolanos v. Superior Court
(2008) 169 Cal.App.4th 744, 761 [citation to trial court order as legal authority was improper].)

                                                 16
aggregate limits applied “separately to each annual period.” (Id.
at p. 1458.) The district court concluded the policies provided full
aggregate limits benefits and refused to prorate, which is
consistent with Stonewall and our approach here. (Id. at
p. 1459.) But the district court also ruled that another policy
whose aggregate limits were defined “for each annual period
during the currency of the policy” and whose term was three
years and five weeks provided three aggregate limits periods, not
four. (Id. at pp. 1459–1460.) The court interpreted what it
considered to be the policy’s plain meaning and did not consider
the insured’s reasonable expectations. (Ibid.) The court relied on
the fact that the policy required premiums to be paid in
installments on the anniversary of the policy and defined the
“first anniversary” of the policy as a date one year and five weeks
after the beginning of the policy. (Id. at p. 1459; accord, UNR
Industries, Inc. v. Continental Ins. Co. (N.D.Ill., Nov. 9, 1988,
Nos. 85 C 3532, 83 A 2523) 1988 WL 121574, *2–*3 [same court
reaching identical conclusion as to policy extended by
endorsement for two months where endorsement amended
anniversary date of the policy to 14-month period].)
      This approach is doubtful because, as we conclude post
regarding one of the policies here, annual calculation of
premiums does not necessarily control the determination of
aggregate limits. In any event, this aspect of the decision is not
applicable here because Old Republic’s policy does not have any
language defining the 17-month term of the policy as one annual
period, either for premium calculation or any other purpose.

                                 17
      William Powell Co. v. OneBeacon Ins. Co. (Ohio Ct.App.
2016) 75 N.E.3d 909, 918–919, considered whether one policy
issued for three years but canceled after 14 months and another
issued for one year but extended by endorsement for an
additional 32 days had one aggregate limit each or two. One
policy declared that if it were “ ‘issued for a period of three years,
the limits of the company liability shall apply separately to each
consecutive annual period thereof.’ ” (Id. at p. 918, italics
omitted.) The other policy stated that “ ‘[i]f this policy is issued
for a period of three years any limit of the company’s liability
stated in this policy as “aggregate” shall apply separately to each
consecutive annual period thereof.’ ” (Id. at p. 919.) The court
nonetheless concluded that there were no consecutive annual
periods because the policies were only for a one-year period
followed by a one-month or two-month period, not consecutive
annual periods. (Ibid.) This analysis simply assumes the
conclusion that an annual period must be a full 12-month period.
The court also noted that the second policy was not originally
issued for three years. (Ibid.) This focus on the duration of the
policies’ original terms would suggest that if a one-year policy
were extended to three years by endorsement there would still be
only a single annual period. We find none of this reasoning
persuasive.
      Finally, the policy in Gen. Refractories v. Ins. Co. of N.
America (Pa.Super.Ct. 2006) 906 A.2d 610, 611 (General
Refractories) said that if it were issued for three years, then the
limits of liability would “ ‘apply separately to each consecutive

                                  18
policy year thereof.’ ” The insured’s policy was written for three
years and extended by endorsement by one month for a prorated
premium because the cost of a renewal policy from the insurer
had risen significantly and the insured wanted to find a new
policy from a different insurer. (Ibid.) The appellate court
affirmed the trial court’s ruling that the policy was not
ambiguous, extrinsic evidence was not necessary to interpret it,
and the extension served only to expand the term of the policy,
not to provide a fourth limits period. (Id. at pp. 612–613.) We
disagree with this reasoning as explained ante. However, we
note that if General Refractories had consulted the extrinsic
evidence, the fact that the insurer provided the extension as an
accommodation to the insured in lieu of charging the increased
rate for the renewal policy could have supported the outcome the
court reached. (Id. at p. 611.) In such circumstances, the insured
likely could not have reasonably expected a full aggregate limit
benefit during the extension period, since the prorated premium
the insured paid was significantly lower than the going rate the
insurer would have charged for a new policy.
  b. American Excess
      We turn next to American Excess, whose policy provided
the balance of Pep Boys’ second layer of excess insurance
coverage. American Excess’s policy demonstrates the effect that
different policy language will have. The policy defines the $5
million limit set forth in the declarations as applying “with
respect to loss excess of the Underlying Insurance which occurs
during the term of this Certificate.” This language is

                                 19
unambiguous. The limits of the policy are set for the entire
duration of the policy, not based on annual periods within the
policy term. Accordingly, when American Excess extended the
term of the policy from one year to 17 months, the same limit set
in the declaration page applied to the new, extended term. Pep
Boys’ reasonable expectations of coverage play no role in the
interpretation of American Excess’s policy because its language is
unambiguous.
      Amazingly, Pep Boys does not even quote this limits
language in its briefing. Instead, it directs us to the language of
the endorsement that extended the policy term. After
establishing the new policy expiration date, the endorsement
states, “It is further agreed and understood that the total
premium is amended to $5,171.00 and the total annual premiums
[remain] $3,655.” Pep Boys construes this as meaning the
premiums were calculated on an annual basis. Pep Boys then
lumps in American Excess with the other insurers and says that
the references to “annual” in all three policies indicate an intent
to provide separate aggregate limits for each annual period in the
policies.
      Pep Boys’ attempt to treat the premium calculation in the
endorsement as governing the limits provision in the policy is
unavailing. American Excess disputes whether the premiums
were calculated separately for the annual periods within the
policy. But even if they were, it would be insufficient to overcome
the policy’s plain definition of its limits as applying to the entire
policy period. The endorsement dispels any uncertainty on the

                                  20
matter by stating (in more language that Pep Boys ignores) that
it does not “alter, vary, or extend any provision or condition” of
the policy “other than as above stated.” Since the endorsement
amended only the expiration date of the policy, it did not affect
the definition of the limits of the policy as applying throughout
the policy term.
  c. Fireman’s Fund
         A. Policy language
      Fireman’s Fund’s policy defines its aggregate limits using
the phrase “annual period,” so our interpretation of Fireman’s
Fund’s policy tracks that of Old Republic’s. The policy sets a $15
million aggregate limit “for all damages sustained during each
annual period of this policy.”
      Fireman’s Fund argues that there is only a single
aggregate limits period because the policy was “written for only
one annual period—a single 15-month policy period” and the
premium was set as a flat charge. This argument subtly tries to
conflate “annual period” with “policy period,” but the policy uses
the former term and not the latter. And as with Old Republic’s
policy, Fireman’s Fund’s approach of treating the 15-month term
of the policy as a single annual period is no more consistent with
the literal meaning of “annual period” than Pep Boys’ view that
the three months remaining after the first year of the policy are a
separate annual period. This policy is ambiguous as well.
      The same extrinsic evidence we considered ante comes into
play again here. The letter from Pep Boys’ broker to the Old
Republic representative states that Pep Boys wanted to get its

                                 21
“insurance program” concurrent with its fiscal year. The
reference to Pep Boys’ “insurance program,” together with the
fact that both Old Republic’s and Fireman’s Fund’s policies
expired on the same date of July 1, 1982, indicates that Pep Boys
intended its Fireman’s Fund policy to last more than one year for
the same reasons as its Old Republic policy. Because there is no
indication that Pep Boys intended to reduce coverage or save
money, its reasonable expectation was that it was obtaining a
new full aggregate limits benefit for the additional three-month
period. But even if we disregard this extrinsic evidence as
pertaining only to Old Republic, the result would be the same
under the rule that ambiguities in an insurance policy are
construed against the insurer.
      Fireman’s Fund cites only two cases that Old Republic did
not. Uniroyal Inc. v. American Re-Insurance Co.
(N.J.Super.Ct.App.Div., Sept. 13, 2005, No. A-6718-02T1) 2005
WL 4934215, *13, *19–*22, held that a one-month extension of a
three-year policy with aggregate limits “for each annual period
during the currency of” the policy did not create an additional
aggregate limit benefit. Uniroyal found the language of the
relevant policy unambiguous, which we disagree with as
explained ante. (Id. at *21.) The court also misconstrued Board
of Trustees of University of Illinois v. Insurance Corp. of Ireland,
Ltd., supra, 969 F.2d at page 334, stating it reformed a policy so
that the extension period was treated as a new policy. (Uniroyal,
at *22.) University of Illinois did affirm the district court’s
reformation of the policy at issue, but the reformation was to

                                  22
make the single policy conform to the parties’ expectation that
the initial policy period and its extension would each have
separate aggregate limits periods, not to create two separate
policies. (University of Illinois, at p. 334 [“the parties to this
contract have clearly expressed their intent that separate
$5,000,000 limits apply to both the stub and one-year periods,
and that the facts demonstrate that the policy as written does not
reflect that intent,” italics added].) The district court was also
clear that it would have reached the same result because of the
prorated premium, even in the absence of facts to support
reformation. (Board of Trustees of University of Illinois v.
Insurance Corp. of Ireland, Ltd., supra, 750 F.Supp. at p. 1384
[“it makes no difference that the parties did not talk about the
coverage issue — the result flows from the one item of totally
objective evidence, the premium itself”].)
      Moreover, there was significant extrinsic evidence in
Uniroyal that is not present here. Providing a full aggregate
limits benefit for the extension would have given the insured far
more coverage than it bargained for, given its documented aims
for its general insurance program. (Uniroyal, supra, 2005 WL
4934215 at *13, *20 [Uniroyal intended to secure $100 million in
insurance annually, so construing the thirty-day extension period
to provide an additional $30 million in coverage “would have
created a far larger overall insurance coverage for that time
period than Uniroyal bargained for”].) The insurers would not
have agreed to the extension had they known the insured wanted
an additional aggregate limit benefit. (Id. at *20.) And, perhaps

                                  23
most importantly, as in General Refractories, the insured
obtained the extension for a prorated extension of the prior
premium because the insurer would have charged the insured a
greatly increased premium to renew the policy. (Ibid.) Under
these circumstances, we might also have concluded that an
additional limits benefit would have been inconsistent with the
insured’s reasonable expectations. But there is no similar
evidence here.
      Diamond Shamrock Chemicals v. Aetna
(N.J.Super.Ct.App.Div. 1992) 609 A.2d 440, 468–469, held that a
one-month extension of a three-year policy did not provide an
additional per occurrence limit, where the policy did not define
the per occurrence limit in annual terms. Because the aggregate
limit in Fireman’s Fund’s policy, like Old Republic’s, is
unambiguously calculated on an annual basis, this opinion is
inapposite.
         B. Choice of law
      As an alternative basis for affirming the trial court’s denial
of Pep Boys’ motion for summary adjudication, Fireman’s Fund
argues that the trial court should have granted Fireman’s Fund’s
motion for summary judgment. Fireman’s Fund argued in that
motion that Pennsylvania law governs and considers all the
asbestos claims against Pep Boys to arise from a single
occurrence, so that the policy’s per occurrence limit cuts off
Fireman’s Fund’s liability regardless of the number of aggregate
limits at issue. The trial court denied Fireman’s Fund’s motion

                                 24
as moot when it ruled that Fireman’s Fund’s policy had only one
aggregate limit.
      There is some uncertainty regarding the proper choice of
law analysis for interpreting contracts like insurance policies.
“In California, ‘general choice-of-law rules have been formulated
by courts through judicial decisions rendered under the common
law, rather than by the legislature through statutory
enactments.’ [Citation.] As the forum state, California will apply
its own law ‘unless a party litigant timely invokes the law of a
foreign state.’ [Citation.]
      “To determine which jurisdiction’s law will govern, a trial
court applies the governmental interest test, which sets out a
three-step inquiry: ‘First, the court determines whether the
relevant law of each of the potentially affected jurisdictions with
regard to the particular issue in question is the same or different.
Second, if there is a difference, the court examines each
jurisdiction's interest in the application of its own law under the
circumstances of the particular case to determine whether a true
conflict exists. Third, if the court finds that there is a true
conflict, it carefully evaluates and compares the nature and
strength of the interest of each jurisdiction in the application of
its own law “to determine which state’s interest would be more
impaired if its policy were subordinated to the policy of the other
state” [citation], and then ultimately applies “the law of the state
whose interest would be the more impaired if its law were not
applied.” ’ ” (Chen v. Los Angeles Truck Centers, LLC (2019) 7
Cal.5th 862, 867–868.)

                                  25
      Despite the statement in Chen that general choice of law
rules are established in judicial decisions and not by statute,
Fireman’s Fund directs us to Civil Code section 1646,6 which
states, “A contract is to be interpreted according to the law and
usage of the place where it is to be performed; or, if it does not
indicate a place of performance, according to the law and usage of
the place where it is made.” Our Supreme Court has not cited
this statute after it adopted the governmental interest approach
summarized in Chen. (See Reich v. Purcell (1967) 67 Cal.2d 551,
555 [adopting governmental interest approach in tort case];
Bernkrant v. Fowler (1961) 55 Cal.2d 588, 594–596 [examining
governmental interests in contract case]; Beneficial Fire &
Casualty Ins. Co. v. Kurt Hitke & Co. (1956) 46 Cal.2d 517, 526
[last California Supreme Court case to cite § 1646].)
      Frontier Oil Corp. v. RLI Ins. Co. (2007) 153 Cal.App.4th
1436, 1447–1461, engaged in a lengthy analysis of the histories of
section 1646 and the governmental interest test for choice of law
problems. Frontier Oil concluded that section 1646 is a choice of
law rule (although the California Supreme Court has never cited
it as such) and the California Supreme Court has not judicially
abrogated it or limited it by interpretation. (Frontier Oil, at pp.
1449, fn. 5, 1459–1460.) Frontier Oil sought to harmonize the
statute and case law by concluding that “the choice-of-law rule in
Civil Code section 1646 determines the law governing the
interpretation of a contract, notwithstanding the application of
the governmental interest analysis to other choice-of-law issues.”

      6
          Subsequent undesignated statutory citations are to the Civil Code.

                                               26
(Id. at p. 1459; but see Textron Inc. v. Travelers Casualty &
Surety Co. (2020) 45 Cal.App.5th 733, 743, 747–748 [using
governmental interest test for choice of law analysis of insurance
policy, despite earlier citing Frontier Oil]; Code Civ. Proc., § 1857
[“The language of a writing is to be interpreted according to the
meaning it bears in the place of its execution, unless the parties
have reference to a different place”]; Frontier Oil, at p. 1448, fn. 4
[declining to decide whether Code Civ. Proc., § 1857 is a choice of
law rule or merely interpretive rule].) However, Frontier Oil
never examined the other state’s law that arguably applied, so it
is not clear whether the two tests would have led to different
outcomes. (Frontier Oil, at p. 1462.) Given that Frontier Oil
later concluded that California and the other state’s law did not
materially differ when it came time to apply the policy provision
at issue, Frontier Oil’s entire discussion, however well-reasoned
or well-researched, may well be dicta. (Id. at pp. 1464–1466.)
      In any event, we need not wade into these deep waters and
determine which choice of law analysis governs. We will assume
for the sake of argument that Pennsylvania and California law
materially differ in how they construe “occurrence” in insurance
policies, as Fireman’s Fund argues. We will likewise assume
Frontier Oil’s analysis is correct and that we must start with
section 1646 to determine which state’s law to use to interpret
the Fireman’s Fund policy. Even granting Fireman’s Fund these
premises, Fireman’s Fund has not shown that Pennsylvania law
should apply.

                                  27
      Under section 1646, Fireman’s Fund’s policy must be
interpreted “according to the law and usage of the place where it
is to be performed,” if it indicates a place of performance.
Contrary to Fireman’s Fund’s view, “indicat[ing] a place of
performance” under section 1646 is not limited to situations in
which the contract expressly states a place of performance.
Frontier Oil explained that “the use of the word ‘indicate’ in
section 1646 in lieu of a more restrictive word such as ‘specify’ or
‘state’ suggests that the Legislature intended a less restrictive
meaning.” (Frontier Oil, supra, 153 Cal.App.4th at p. 1450.)
Instead, the court held, “A contract ‘indicate[s] a place of
performance’ within the meaning of section 1646 if the contract
expressly specifies a place of performance or if the intended place
of performance can be gleaned from the nature of the contract and
its surrounding circumstances.” (Id. at p. 1443, italics added; see
also id. at pp. 1450–1451.) Frontier Oil further held that the
place of performance of an insurance policy is the place of the
insured risk. (Id. at pp. 1461–1462.) Accordingly, under section
1646 the policy must be interpreted according to the law of the
different states where Pep Boys had stores selling asbestos-
containing products that would be covered by Fireman’s Fund’s
policy.
      Our choice of law inquiry runs into a dead end at this point.
The record does not identify any states besides California in
which Pep Boys sold the products at issue in the underlying tort
claims for which it seeks coverage. The only relevant evidence is
a declaration by an employee of Pep Boys’ parent company

                                 28
stating that Pep Boys operates stores nationwide, including 145
stores in California, and that Pep Boys faces hundreds of claims
based on exposure to asbestos in those products, including claims
of over 500 individuals in California. There is not even an
indication that Pep Boys faces any claims at all for products sold
in Pennsylvania, the state whose law it would have us apply.
This does not provide us sufficient information to determine
which states’ laws should be applied under section 1646.7
         Because the policy does not indicate any single place of
performance, Fireman’s Fund would have us look instead to the
place where the policy was made, which it asserts is
Pennsylvania. But Fireman’s Fund cites no authority requiring
the policy to have only one place of performance, and we see no
reason why it must. Our research demonstrates that it is
accepted in insurance law that a single policy can be interpreted
and applied differently in different states. “A liability insurance
policy issued on a nationwide basis may be construed in
accordance with the law of the jurisdiction in which a particular
claim arises. (See Stonewall Surplus Lines Ins. Co. v. Johnson
Controls, Inc. (1993) 14 Cal.App.4th 637, 646–647.) Thus, the
same policy language may receive different construction and
application in different jurisdictions. Parties to an insurance
contract understand this.” (Downey Venture v. LMI Ins. Co.
(1998) 66 Cal.App.4th 478, 514.) “ ‘Where a multiple risk policy

        7
          Pep Boys’ primary insurance policy lists various stores and service facilities that the
company owned at the time, some of which were in Pennsylvania, some in California, and some
elsewhere. However, this does not establish that the claims against Pep Boys for which it seeks
coverage in this case relate to any of the stores in Pennsylvania. We also note that there are
considerably more California locations than Pennsylvania locations.

                                                29
insures against risks located in several states, it is likely that the
courts will view the transaction as if it involved separate policies,
each insuring an individual risk, and apply the law of the state of
principal location of the particular risk involved.’ ” (Johnson
Controls, at pp. 646–647.) Thus, according to section 1646, the
policy should be interpreted according to the law of every state
where the insured risks were located.
      The analysis that section 1646 calls for would likely prove
unworkable in practice, since Pep Boys operated stores
nationwide. It seems likely, then, that finding a practical
solution to the choice of law question would likely require us to
apply the governmental interest test after all. But since
Fireman’s Fund has not analyzed the competing interests of
California and Pennsylvania or any other states under that test,
either, the end result would be the same: Fireman’s Fund has
failed to demonstrate that any foreign states’ laws should apply.
Accordingly, we fall back on the default choice of law principle
that a California court will apply California law. (Chen v. Los
Angeles Truck Centers, LLC, supra, 7 Cal.5th at p. 867.)
Fireman’s Fund’s motion for summary judgment based on choice
of law rules therefore does not provide an alternative basis on
which to affirm the trial court’s judgment.
                          DISPOSITION
      The trial court’s judgment is reversed.

                                            BROWN, P. J.

WE CONCUR:

                                  30
STREETER, J.
GOLDMAN, J.

The Pep Boys et al. v. Old Republic (A166574)

                                        31
Trial Court:   San Francisco City & County Superior Court

Trial Judge:   Hon. Murlene J. Randle

Counsel:       Roxborough, Pomerance, Nye & Adreani LLP,
               Drew E. Pomerance; Yoka & Smith LLP,
               Walter Michael Yoka, Michelle J. An for
               Plaintiff and Appellant.

               Nicolaides Fink Thorpe Michaelides Sullivan
               LLP, Matthew C. Lovell, Alison V. Lippa,
               Kimberly A. Hartman for Defendant and
               Respondent Fireman’s Fund Insurance
               Company.

               Clausen Miller, PC, Ian R. Feldman, Amy R.
               Paulus, Don R. Sampen for Defendant and
               Respondent Old Republic Insurance Company

               Craig & Winkelman LLP, Bruce H. Winkelman
               for Defendant and Respondent New England
               Reinsurance Corporation and Executive Risk
               Indemnity, Inc fka American Excess Insurance
               Company.