Unpublished Disposition, 908 F.2d 977 (9th Cir. 1989)

MEMORANDUM^**

The defendant Richard Grand appeals from a final order of the district court granting summary judgment in favor of St. Paul Fire and Marine Insurance Company (St. Paul) in this declaratory judgment action. Grand contends that the district court entered summary judgment without giving him an opportunity to show by discovery that genuine issues of material fact made summary judgment inappropriate. Upon consideration of the briefs and arguments of counsel together with the record on appeal, we conclude that the district court properly entered the final summary judgment order. Accordingly, we affirm the judgment of the district court.

Richard Grand is a lawyer in Tucson, Arizona who has employed other lawyers from time to time in his office. In February 1988 two former employees of Grand filed suit in a state court in Arizona claiming that Grand breached the terms of their employment contract and committed fraud. They sought damages on the ground that Grand had fraudulently induced them to enter into the contractual arrangements and further that he had breached promises for eventual partnership in the firm and substantial bonuses. The wife of one of the former employees joined in the suit and a month later a third former employee and his wife were permitted to intervene as plaintiffs.

St. Paul insured Grand under two separate policies which were in effect at the times that the plaintiffs in the state court action claimed Grand committed the acts that injured them. One policy covered attorney professional liability and was a typical professional liability policy designed primarily to provide protection against claims of legal malpractice. The other was a "professional office package policy" that provided comprehensive general liability coverage including coverage for "bodily injury" and "personal injury" claims. Grand notified St. Paul of the state court action and demanded that St. Paul defend that action. St. Paul responded by defending under a reservation of rights. After St. Paul determined that neither policy provided coverage for the claims of the former employees, it commenced this declaratory judgment action in the United States District Court for the District of Arizona.

In the course of the state court litigation Grand took the depositions of the former employees. He contended before the district court in the present action that the plaintiffs in the state court litigation made statements in their depositions which indicated that they were claiming more than fraud and breach of contract as set forth in the complaint. He asserted that the claimants had alleged other injuries including emotional distress, damage to reputation and belittlement of work product. Those depositions in the state litigation were sealed, however, at the request of Grand. The plaintiffs in the state litigation never amended their complaint to enlarge their claims and, their lawyer repeatedly stated that the lawsuit was based only on claims for breach of contract and fraud. Nevertheless, Grand contended that if he were permitted to depose the former employees again in the federal declaratory judgment action, he would be able to establish that they were seeking damages in the state court action for "personal" and "bodily" injuries. The district court denied the motion for discovery and entered summary judgment for St. Paul.

On appeal Grand argues that there was coverage under both policies for the claims made by the former employees and that the district court should have permitted him to develop his theory. At about the time the district court entered summary judgment in the present case, Grand settled the state court litigation by paying the former employees one million dollars. After the appeal to this court was commenced, Grand sought to supplement the record with affidavits by the former employees that they did in fact seek and obtain damages by way of settlement for personal and bodily injuries, and with pleadings in yet another court action between them and Grand in which they characterized the settlement as one for personal injuries.

In addition to claiming that the office package policy covered the alleged claims for emotional distress, damaged reputation and belittlement of work product, Grand argues that the professional liability policy covered his activities as manager of the law firm. He reaches this conclusion by reading language within an exclusion that created an exception to the exclusion.

We review de novo the district court's order granting summary judgment. Christian Gospel Church, Inc. v. City and County of San Francisco, 896 F.2d 1221, 1223 (9th Cir. 1990).

On appeal, Grand argues that the district court committed reversible error in denying his motion to take the depositions of the employees who were plaintiffs in the state court action. We disagree. A district court has broad discretion in considering a motion to grant discovery, Data Disc, Inc. v. Systems Technology Associates, Inc., 557 F.2d 1280, 1285 n. 1 (9th Cir. 1977), and in terminating discovery, even when a motion for summary judgment has been made by the non-moving party. Beneficial Standard Life Ins. Co. v. Madariaga, 851 F.2d 271, 277 (9th Cir. 1988).

Under the facts of this case the district court did not abuse its discretion. This action was filed on February 26, 1988, and some discovery was conducted. Grand made a formal request pursuant to Fed. R. Civ. P. 56(f) on January 31, 1989, to depose the state court plaintiffs. The stated purpose of the depositions would be to establish that the former employees claimed damages in the state action for emotional distress, invasion of privacy and injury to reputation. Grand argued that such claims came within the "bodily" and "personal" injury coverage of the office package policy. Grand had previously taken the depositions of these same witnesses in the state court proceedings, but had caused the depositions to be sealed, thus making them unavailable for use in the present action.

It is clear that additional depositions would not have changed the court's summary judgment ruling. The putative deposition witnesses had already established by their formal pleadings in the state court action that they sued only for fraud and breach of contract, two causes of action not covered by the policy. Furthermore, their attorney had represented to the court in the present action that in the state court action they claimed damages only for fraud and breach of contract. Any testimony by the former employees that they had suffered "bodily" or "personal" injury would have been irrelevant; St. Paul's coverage is determined by the claims they actually made.

As we indicated in discussing the deposition issue, the claims made in the state court action were not within the coverage of the office package policy. There is an additional reason for affirming the district court's conclusion that there was no coverage under that policy with respect to the alleged "bodily injuries." Even if the plaintiffs had brought "bodily injury" claims, the policy would still preclude coverage because it clearly and unambiguously excludes coverage for "bodily injuries" to employees and their spouses. The policy states: "We won't cover bodily injury to an employee arising out of and in the course of his or her employment by a protected person. Nor will we cover bodily injury to the spouse, child, parent, brother or sister of that employee which results from bodily injury to the employee."

On appeal, Grand asks this court to reverse the district court on the basis of pleadings filed by the state court plaintiffs in an inter-pleader action after the district court rendered judgment in the present case, and statements by the former employees that they now consider part of the settlement to be for "personal injuries." This court can take judicial notice of proceedings in another court or administrative agency, even though not part of the record of the case on appeal. Bryant v. Carleson, 444 F.2d 353, 357-58 (9th Cir.), cert. denied, 404 U.S. 967 (1971). Nevertheless, we decline to consider the proffered materials in this case. Having succeeded in gaining a settlement with Grand, the state court plaintiffs are now considering the tax status of the money they will receive. If they can convince the Internal Revenue Service that any part of the payment is compensation for personal injuries, to that extent the money received will not be subject to federal income taxes. Their latter-day contention that they sought damages from Grand for personal or bodily injury is completely self-serving and diametrically opposed to every representation they have previously made about the nature of their claims.

Grand's arguments with respect to the professional liability policy are equally unpersuasive.

The St. Paul professional liability protection policy states that the insurer will "pay amounts you ... are legally required to pay to compensate others for loss that results from an error, omission or negligent act committed in the performance of legal or notary services." The policy also contains an exclusion which provides: "We won't cover claims that result from any protected person's activity as both lawyer and manager in an organization other than your law firm."

Grand attempts to argue that the exclusion creates coverage in this case. He notes that he is being sued for management activities within his own law firm. Because the exclusion only speaks about management activities outside the insured's law firm, Grand argues that his internal management activities are implicitly covered. He contends that this clause is ambiguous and should be construed in favor of coverage and against exclusion. See Roberts v. State Farm Fire & Casualty Co., 705 P.2d 1335, 1336-37 (Ariz.1985). See also State Farm Mutual Auto. Ins. Co. v. Paynter, 593 P.2d 948, 954 (Ariz.App.1979); Federal Ins. Co. v. P.A.T. Homes, Inc., 547 P.2d 1050, 1053 (Ariz.1976) (where the insurer drafts confusion into the policy, ambiguity should be resolved in favor of the insured).

The defendant's arguments are again without merit. The professional liability policy clearly restricts coverage to claims related to "legal services." In this case, the claims brought against Grand had nothing to do with "legal services" or malpractice. The claims were for fraud and breach of contract. Moreover, the exclusion is not ambiguous. It is obviously designed to preclude coverage for a lawyer's malpractice committed outside the scope of that individual's law firm practice. Given the number of lawyers who sit on various boards and committees independent of their law firm related duties, this exclusion legitimately limits coverage under a policy designed to protect against malpractice claims related to the practice of law. Not surprisingly then, the validity of this kind of policy has been upheld by other courts and the interpretation Grand suggests implicitly rejected. See Blumberg v. Guarantee Ins. Co., 192 Cal. App. 3d 1286 (1987) (no coverage between partners under malpractice policy who sue each other for breach of the partnership agreement and fraud); Transamerica Ins. Co. v. Sayble, 193 Cal. App. 3d 1562 (1987) (disputes among a firm's attorneys concerning conditions of employment and operation of business not "professional services" within the meaning of malpractice coverage).

Grand also maintains that an affidavit by an "insurance expert" that he filed created a genuine issue of material fact by establishing that the policy is ambiguous, thus precluding summary judgment. The affiant, an attorney, concluded in his affidavit that there was coverage for the claims of the former employees "based on the grant of coverage contained in the 'Management Activity' exclusion." In Arizona, coverage under an insurance policy is a question of law, not one of fact. The court was free to weigh the "expert's" opinion and accept or reject it in performing its function of interpreting the insurance contract. Roberts, 705 P.2d at 1337 (" [w]hether or not a contract of insurance is ambiguous is purely a question of law"). As previously indicated, we agree with the district court's determination that the exclusion did not create coverage. The affidavit did not preclude the entry of summary judgment for St. Paul.

CONCLUSION

St. Paul acted in accordance with its obligations under the two insurance policies. It defended the state court actions under a reservation of rights until it became convinced that there was no coverage and then it brought the present declaratory judgment action. At the time this case was submitted to the district court on the motion for summary judgment the record completely supported St. Paul's position that the state court litigation involved claims that were not covered under either policy. Not only did the plaintiffs in the state court litigation never offer to amend their complaint to enlarge the theory on which they sought damages; their attorney repeatedly assured the court that the claims were for fraud and breach of contract only. Further, the district court did not abuse its discretion in denying Grand's request to take the depositions of the state court plaintiffs.

The judgment of the district court is AFFIRMED.