Unpublished Disposition, 914 F.2d 262 (9th Cir. 1989)

MEMORANDUM^* 

OVERVIEW

In this diversity action, Fidelity and Deposit Co. (Fidelity) appeals from the district court's grant of summary judgment, finding that Continental Insurance Co. (Continental) was entitled to subrogation from Fidelity for the costs of defending and settling a lawsuit filed against Young, Smith and Peacock, Inc. (YSP). We affirm.

FACTS

YSP is a brokerage firm. Fidelity issued a standard form stockbrokers blanket bond to YSP that covered YSP for, among other things, losses sustained as a result of forgery or alteration of documents by YSP employees so long as YSP discovered the claim during the effective period of the bond. The bond was in effect from June 21, 1981, to June 21, 1984. Continental issued an identical bond to YSP for the year immediately following Fidelity's coverage, with an effective period from June 21, 1984 to June 21, 1985.

On September 2, 1982, Nicholas J. Sevano (Sevano), a YSP customer, filed a federal complaint in the Central District of California against YSP and one of its employees, alleging federal securities law violations as well as state and federal common law causes of action, based in part on forgery by the YSP employee. On March 22, 1985, YSP tendered its defense in the federal action to Fidelity, who refused to defend or indemnify YSP. The Sevano federal action was dismissed on October 31, 1985.

Sevano also filed a state action against YSP on April 26, 1985 based on the same facts. On November 22, 1985, YSP's counsel, Louise LaMothe, wrote a letter to Continental tendering the Sevano state action for defense and indemnity (the Lamothe letter), enclosing a copy of the state complaint. Continental agreed to defend YSP, and participated in a settlement of the state action on May 20, 1986.

After the settlement, in June of 1986, Continental learned that YSP had discovered Sevano's claim at least as early as September 2, 1982, when Sevano filed his federal complaint, and long before the June 21, 1984 effective date of Continental's bond. Continental filed an action for indemnity and equitable subrogation against Fidelity for $106,375 in the district court on July 15, 1987. Fidelity moved for summary judgment, contending that Continental had acted as a volunteer in paying YSP's claim and thus was not entitled to subrogation. Continental filed a cross-motion for summary judgment, and after oral argument the district judge granted Continental's motion on January 12, 1989.

ISSUES

Continental's defense of YSP

This court reviews the district court's grant of summary judgment de novo, viewing the evidence in the light most favorable to the nonmoving party to determine whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. T.W. Elec. Services, Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 629-32 (9th Cir. 1987).

Under California law, " [a] right to indemnity may arise from contract express or implied or from the equities of a given situation. It applies in cases in which one party pays a debt for which another is primarily liable and which in equity and good conscience should have been paid by the latter party." Aetna Life & Casualty Co. v. Ford Motor Co., 50 Cal. App. 3d 49, 52, 122 Cal. Rptr. 852, 854 (1975) (citation omitted). Equitable indemnity and subrogation are not available to a volunteer or "officious intermeddler," who has no legal obligation to pay nor any interest to protect in making the payment. Employers Mut. Liab. Ins. Co. v. Pacific Indem. Co., 167 Cal. App. 2d 369, 376-77, 334 P.2d 658, 662 (1959).

A party making a good-faith payment under a reasonable belief that the payment is necessary to protect his own rights or interests, however, is entitled to indemnity or subrogation even if it subsequently develops that he had no interest to protect. Aetna Life, 50 Cal. App. 3d at 52-53, 122 Cal. Rptr. at 854. "The liability of an insurer need not be ironclad in order for it to settle a claim without a subsequent finding that the payment to the insured was voluntary." Weir v. Federal Ins. Co., 811 F.2d 1387, 1395 (10th Cir. 1987) (citing Agricultural Ins. Co. v. Smith, 262 Cal. App. 2d 772, 778-79, 69 Cal. Rptr. 50, 55 (1968)). This general rule encourages the prompt settlement of claims. Weir, 811 F.2d at 1395 n. 6.

Fidelity claims that Continental acted as a volunteer in the Sevano state action because Continental's belief that it had a duty to defend YSP was unreasonable. The Lamothe letter tendering YSP's defense to Continental included a copy of the Sevano state complaint and stated "Plaintiff's prior action against YSP for violation of Sec. 10(b) of the Securities Act and Rules 10b-5 and 10b-16 promulgated thereunder in the United States District Court for the Central District of California was dismissed with prejudice in favor of the defendants on November 4, 1985." The state complaint makes no reference to the federal action, and while it indicates that Sevano learned of the forgery on or about March 10, 1982, it does not state when YSP discovered Sevano's claim.

Given the contents of the LaMothe letter, Fidelity argues that Continental should have investigated the federal complaint before it agreed to defend YSP, and its failure to do so was unreasonable. If it had investigated, Continental would have realized from the September 2, 1982, date of filing the federal suit that YSP learned of Sevano's claim before Continental's bond went into effect. Continental counters that it had no reasonable basis to believe that the federal claim was related, and from all the material furnished, it reasonably appeared that YSP discovered the loss during Continental's bond period, when the state complaint was filed.

We find that Continental's decision to defend was not unreasonable, and Continental was not a volunteer. When, based on the allegations of the complaint, an insurer is obligated to defend the insured, the insurer is certainly not a volunteer. State Farm Fire & Casualty Co. v. Cooperative of Am. Physicians, Inc., 163 Cal. App. 3d 199, 204; 209 Cal. Rptr. 251, 253 (1984). "An insurer bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy irrespective of the source of its information." Smith v. Travelers Indem. Co., 32 Cal. App. 3d 1010, 1017, 108 Cal. Rptr. 643, 648 (1973).

Indeed, the duty to defend is so broad that as long as the complaint contains language creating the potential of liability under an insurance policy, the insurer must defend an action against its insured even though it has independent knowledge of facts not in the pleadings that establish that the claim is not covered.

CNA Casualty v. Seaboard Surety Co., 176 Cal. App. 3d 598, 606, 222 Cal. Rptr. 276, 279 (1986) (emphasis in original). Although further investigation by Continental might have revealed that its bond was not in effect when YSP discovered Sevano's claim, it does not follow that its belief that it had a duty to defend was unreasonable, or that it became a stranger or intermeddler with no interest to protect. See Smith, 32 Cal. App. 3d at 1017, 108 Cal. Rptr. at 648.

Fidelity's refusal to defend YSP

Another sequence of events presents an additional reason for awarding equitable subrogation. On February 20, 1986, Fidelity filed a declaratory judgment action against YSP to determine Fidelity's duty to defend YSP in Sevano's federal and state suits. On October 2, 1986, five months after Continental had settled the state action with YSP for $106,375, the district judge in the declaratory relief action ruled that Fidelity had a duty to defend YSP. Fidelity subsequently settled the declaratory judgment action with YSP for $335,000, after assuring YSP that Continental's right to reimbursement from Fidelity would not be hindered by the settlement agreement.

Fidelity does not appeal the district court's ruling that it was obligated to defend YSP in the Sevano state action, based on the collateral estoppel effect of the ruling in the declaratory relief action.

Under general principles of equitable subrogation, as well as pursuant to the rule of prime importance--that the policy is to be liberally construed to provide coverage to the insured--it is our view that all obligated carriers who have refused to defend should be required to share in costs of the insured's defense, whether such costs were originally paid by the insured himself or by fewer than all the carriers.

Continental Casualty Co. v. Zurich Ins. Co., 57 Cal. 2d 27, 37, 17 Cal. Rptr. 12, 18, 366 P.2d 455, 461 (1961). Continental submits that under this general rule Fidelity should not escape the full cost of defending YSP.

Fidelity stated in the district court that the $335,000 settlement with YSP in the declaratory relief action would have been no different had Continental's $106,375 payment been in issue during the negotiations. On appeal, Fidelity argues that it would have compromised YSP's claim for a lesser amount than that paid by Continental.

Although Fidelity did not escape without payment on its obligation to YSP, it seems likely that it paid less than it would have paid if Continental had not defended YSP and contributed toward the settlement of the state action. "It has long been the rule in California that 'no insurer which deliberately breaches its obligation to the insured should be permitted thereby to profit, whether at the expense of the insured, or of an insurer which faithfully discharges its obligation.' " State Farm, 163 Cal. App. at 204, 209 Cal. Rptr. at 253 (emphasis added, quoting Continental Casualty, 57 Cal. 2d at 38, 17 Cal. Rptr. at 19, 366 P.2d at 462). In this case, Fidelity's refusal to defend YSP was at Continental's expense, and this general principle argues for equitable subrogation.

We AFFIRM.