Unpublished Disposition, 899 F.2d 18 (9th Cir. 1990)

Fairbanks North Star Borough appeals from an adverse summary judgment in this diversity action which arose out of the refusal of the Insurance Company of Ireland (ICI) to indemnify defense costs expended in settling two liability claims. Because we conclude the district court erred in the application of Alaska law, we reverse and remand to award judgment for Fairbanks.

BACKGROUND

Fairbanks is a municipal government under the laws of Alaska. Prior to July 1, 1984, it purchased property and liability coverage from ICI. The policy obligated ICI to indemnify Fairbanks for up to five million dollars combined single limit coverage for the Ultimate Net Loss (UNL) arising from each and every occurrence in excess of the Self-Insured Retention (SIR). The policy required Fairbanks to pay the first $100,000 when liability had been imposed against it by law or assumed by contract or agreement.

The policy was effective for one year. During this time, Fairbanks did not have a copy. Fairbanks gave notice of cancellation on July 1, 1985 and ten days later it received a copy of the policy. It assumed liability and settled two claims for amounts in excess of the SIR. It incurred $172,000 in legal, expert and adjustment costs in conjunction with the settlement and sought reimbursement from ICI. It then sued for that amount in district court after ICI denied coverage.

Both parties moved for summary judgment. The district court granted ICI's motion. It construed the UNL clause to require that ICI appoint the person who incurred the defense costs.

We have jurisdiction pursuant to 28 U.S.C. § 1291. Alaska law governs this diversity action.

DISCUSSION

"A grant of summary judgment is reviewed de novo to determine whether, viewing the evidence in a light most favorable to the non-moving party, there are any genuine issues of material fact and whether the district court applied the relevant substantive law." Tzung v. State Farm Fire and Cas. Co., 873 F.2d 1338, 1339-40 (9th Cir. 1989).

Fairbanks argues that the policy it bought from ICI was a contract of adhesion in determining the rights of the parties. ICI contends that Fairbanks is a municipality with skilled advisors, that the bargaining power between the parties was not disproportionate and that the justification for treating insurance policies as contracts of adhesion does not exist.

Although the Alaska Supreme Court has not consistently stated a rule of law on this subject, we find that its recent trend is to construe insurance policies as contracts of adhesion. E.g., Alaska Rural Electric Coop. Ass'n v. INSCO Ltd., No. S-3068, slip op. 3549 (Alaska Jan. 26, 1990) ("An insurance policy is a contract of adhesion") (emphasis added); Whispering Creek Condominium Owner Ass'n v. Alaska National Ins. Co., 774 P.2d 176 (Alaska 1989) ("It is well established that we treat insurance policies as contracts of adhesion") (emphasis added); Stordahl v. Government Emp. Ins. Co., 564 P.2d 63, 65 (Alaska 1977) ("An insurance policy may be considered a contract of adhesion") (emphasis added).

Alaska law provides also that because insurance policies are treated as contracts of adhesion, they are construed according to the principle of reasonable expectations. State v. Underwriters at Lloyds, 755 P.2d 396, 400 (Alaska 1988). Under this principle, an insurance policy is "construed to provide the coverage which a lay person would have reasonably expected given a lay interpretation of the policy language." Stordahl, 564 P.2d at 66.

The lay person standard is an objective one which requires the insured to prove that his expectations of coverage were objectively reasonable as demonstrated by extrinsic evidence. O'Neill Investigations Inc. v. Illinois Employers Ins. Co., 636 P.2d 1170, 1177 (Alaska 1981). If an insured is successful in proving that his expectations of coverage were objectively reasonable, those expectations will control even though "painstaking study of the policy provisions would have negated those expectations." State v. Underwriters at Lloyds, 755 P.2d 396, 400 (Alaska 1988) (quoting R. Keeton, Basic Text on Insurance Law Sec. 6.3(a) at 351 (1971)) .

Fairbanks contends that it expected that defense costs incurred in the settlement or compromise of liability claims in excess of the $100,000 retention limit would be indemnified. It says that contacts with the insurer and the language of the policy demonstrate an objectively reasonable expectation of coverage. We agree.

Four factors are considered to determine whether coverage should reflect the principle of reasonable expectations: (1) the language of the disputed policy provision; (2) the language of other provisions of the policy; (3) relevant extrinsic evidence; and (4) case law interpreting similar provisions. Stordahl, 564 P.2d at 66. We consider the first two factors together.

The Policy Language

We start with the language of the disputed provision. Fairbanks maintains that policy language also creates an objectively reasonable expectation of coverage. According to the SIR clause,¹  Fairbanks expected to pay the first $100,000 on liability claims within the policy provisions and defense costs associated with those claims. It says that the basic insuring agreement,²  which refers to the Ultimate Net Loss clause,³  supports its argument that both liability amounts and defense costs were reimbursable. We agree.

The objective test which determines the reasonable expectations of the parties is focused at the time when the policy was secured. Graham v. Rockman, 504 P.2d 1351, 1357 n. 15 (Alaska 1972). Evidence supports Fairbanks' contention that it did not receive a copy of the policy until ten days after it gave notice of cancellation. We must determine whether "secured" means at the time of delivery to the insured even when delivery came after policy cancellation.

ICI explained that the normal practice in England was that insurance policies were not transmitted to insureds until after policies were canceled. The implication is that Fairbanks cannot demonstrate its reasonable expectations of coverage by consideration of the policy language. Receipt of the policy after cancellation, however, does not prevent application of the objective test. Under the circumstances of this case, we conclude that "secured" means at the time of delivery.

The insuring agreement purports to indemnify Fairbanks for all sums that it is obligated to pay as defined in the term "Ultimate Net Loss" for damages arising from any occurrence happening during the policy period. It indicates that the UNL dictates what sums will be indemnified. A reasonable person would look to the UNL clause to determine what is meant by the phrase all sums.

The UNL clause allocates payment obligations of ICI for a laundry list of defense costs, including the attorneys' fees at issue here. ICI argues that the UNL clause is identical to the SIR clause in that both provisions allocate legal costs to Fairbanks. Thus, ICI reasons that Fairbanks must pay all legal and other defense costs unless ICI specifically appoints the person who incurs them inasmuch as Fairbanks hired the attorney who incurred legal costs in settlement of the claims. ICI maintains that Fairbanks may not claim that the policy language supports its expectation of indemnification when the "appointment" clause of the UNL indicates otherwise.

We conclude first that ICI's reliance on the SIR clause is misplaced. It is not particularly significant that the clause allocates to Fairbanks the obligation to pay all legal costs without indemnification. The policy is not effective until liability has been imposed upon Fairbanks by settlement or judicial decree in excess of $100,000. Therefore, just because the SIR obligates Fairbanks to pay both liability and defense costs when liability does not exceed the SIR does not determine its obligation when liability exceeds the SIR.

Second, although the UNL clause contains an appointment provision which purports to condition indemnification of defense costs, this alone is not dispositive. Nor is it dispositive that the clause was not artfully drafteD. Alaska law provides that we must look at the policy as a complete document.

It is significant that this policy has an exclusion clause and even more significant that defense costs are not excluded from coverage in this portion of the policy. A reasonable person would look to the exclusion clause to determine what occurrences are not covered. Upon reading the exclusion clause, such person would not find that defense costs were excluded from coverage.

ICI claims that a reading of the SIR clause, the insuring agreement and the UNL clause clearly demonstrates exclusion of defense costs. On the contrary, the insuring agreement gives coverage for all sums. All sums include defense costs listed in the UNL clause. We fail to see, under these circumstances, how the policy language could negate any reasonable expectation that defense costs were indemnified.

Relevant Extrinsic Evidence

Fairbanks claims that three telexes between the parties' brokers provided it with a reasonable expectation of coverage for defense costs.

The first was sent three months into the policy period by Fairbanks' broker. It sought confirmation that defense costs were included in the policy once the SIR limit was exceeded on a liability claim. The answer from ICI's broker was garbled and he sent a third.⁴ 

ICI made two arguments about the telexes in the district court and at oral argument on appeal, but neither was addressed in its appellate brief. First, it argued that the telexes were inconclusive and there was no clear agreement that defense costs were covered. Second, it claimed that the London broker had no authority to commit ICI to a construction that defense costs were included.⁵  We reject these arguments.

Similar Provisions interpreting similar provisions. Fairbanks contends that defense costs typical ly are excluded from UNL clauses and that their inclusion here is significant. In addition, it argues that indemnification policies in general have provisions for proportional adjustment of legal costs. See Planet Ins. Co. v. Mead Rein surance Corp., 789 F.2d 668, 671 (9th Cir. 1986). ICI counters that Fairbanks could not have had a reasonable expectation of coverage in light of specific policy language.

We think the language of this policy does not contradict a reasonable expectation of coverage. Given the fact that defense costs are usually excluded from coverage, it is significant here that defense costs are enumerated. Moreover, this policy contains language, unlike similar ones, requiring that the parties "shall cooperate to the mutual advantage of both." [Appellee Supp.Ext. of Record at 000014.] This suggests that both parties act accordingly. In this situation, a reasonable insured person would not think that he was totally responsible for payment of defense costs.

CONCLUSION

In light of these factors, we conclude that Fairbanks had a reasonable expectation of coverage for defense costs at the time the policy was secured.⁶  The judgment is reversed and we remand for the district court to award judgment to Fairbanks.

REVERSED AND REMANDED.