Unpublished Disposition, 902 F.2d 40 (9th Cir. 1988)

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US Court of Appeals for the Ninth Circuit - 902 F.2d 40 (9th Cir. 1988)

No. 88-2824.

United States Court of Appeals, Ninth Circuit.

Before TANG and BEEZER, Circuit Judges, and STEPHENS,*  District Judge

MEMORANDUM** 

Appellants Cardon Oil Company, Wilford Cardon, Craig Cardon and Elijah Cardon ("the Cardons") appeal the district court's order of reimbursement under 28 U.S.C. § 2202 after its grant of summary judgment in favor of Omaha Indemnity Insurance Company ("Omaha") in Omaha's diversity action for declaratory relief against the Cardons. They argue that relief under Sec. 2202 is limited to that necessary to effectuate the declaratory judgment. As to the merits, they argue that their failure to respond to Omaha's letter reserving Omaha's right "to seek reimbursement" does not entitle Omaha to reimbursement of defense costs incurred by Omaha on the Cardons' behalf. We affirm.

* Omaha insured the Cardons under a comprehensive general liability policy which provided coverage for claims of bodily injury and property damages, as those terms are defined in the policy. In 1985, the Cardons were sued for alleged securities fraud. Subsequently, on or about March 19, 1986, they demanded that Omaha "provide the cost of defense coverage to which the Cardons are contractually entitled," threatening litigation if Omaha did not comply. Omaha responded by agreeing to defend the Cardons under a reservation of rights. In its June 27, 1986 reservation of rights letter, Omaha expressly reserved its right to seek reimbursement for attorney's fees and costs advanced under the reservation of rights defense:

We will continue, as we have done to date, to provide your defense in the District Court actions by counsel of your choosing, subject to the reservations set forth herein and until such time as the Court has adjudicated your right to such defense or to indemnification through the Omaha Indemnity Policy.

Additionally, Omaha Indemnity specifically reserves its right to seek reimbursement of all defense costs, including attorney's fees, paid to or on behalf of Wilford Cardon, Craig Cardon, Elijah Cardon or Cardon Oil Company with respect to the District Court Actions. In that regard, it is contemplated that a declaratory relief action will be filed by Omaha Indemnity against the Cardons' and Cardon Oil Company and perhaps other parties to the District Court Actions. That declaratory relief action will seek a ruling from the Court that neither defense nor indemnity is owed under the policy. That action will also seek reimbursement of any defense costs paid to or on behalf of any person or entity claiming entitlement to defense or indemnity under the policy.

(Emphasis added). The Cardons failed to respond to this letter. However, on August 1, 1986, Omaha commenced paying the attorneys representing them in the underlying action.

Omaha filed its complaint for declaratory relief in March 1987. On December 8, 1987, the district court granted Omaha's motion for summary adjudication, finding that Omaha had no obligation under the policy either to defend or indemnify the Cardons. The court made no ruling regarding Omaha's right to recover defense costs, but nevertheless entered judgment on December 11, 1987 against the Cardons and dismissed the action.

On March 18, 1988, Omaha filed a second motion for summary adjudication, seeking an adjudication that Omaha was entitled to reimbursement from the Cardons of the monies advanced on their behalf under the reservation of rights defense. On March 25, 1988, the Cardons filed a motion to strike Omaha's motion for summary adjudication, asserting that the district court lacked jurisdiction. On April 15, 1988, Omaha filed its motion for order reimbursing attorneys' fees under 28 U.S.C. § 2202.

On May 13, 1988, the district court entered its order granting Omaha's motions, treating both as being brought under Sec. 2202 and awarded Omaha $495,754.13 as reimbursement of litigation expenses advanced on behalf of the Cardons. The Cardons subsequently filed this appeal of the order of reimbursement on June 10, 1988.

II

The Cardons argue that relief under Sec. 2202 may only be granted "so as to effectuate a grant of declaratory relief" (quoting Penthouse Int'l Ltd. v. Barnes, 792 F.2d 943, 950 (9th Cir. 1986)). However, they fail to cite a single case other than Penthouse in support of this proposition. In Penthouse, the district court held that the publisher had no right to publish certain photographs under the model's own name. Consequently, the court issued an injunction to prevent the publisher from thus violating the model's rights. On appeal, we held that " [t]he Declaratory Judgment Act provides the district court with the power to issue an appropriate order so as to effectuate a grant of declaratory relief." 792 F.2d at 950. However, contrary to the Cardons' assertions, we did not even imply that our language "so as to effectuate" should be read as restricting the scope of Sec. 2202 relief. Instead, the language merely addressed the facts of that particular case.

In fact, the D.C. Circuit has specifically rejected such a restrictive reading of Sec. 2202. In Horn & Hardart Co. v. National Rail Passenger Corp., the court held that

Section 2202 ... provides for "necessary or proper relief"--specifically, "proper relief based on the declaratory judgment." 28 U.S.C. § 2202 (emphases added). Amtrak's request for further relief in the form of triple rent and attorneys' fees follows absolutely from, and is based on, the district court's decision in Horn & Hardart I confirming Amtrak's right to terminate the leasehold. And even though Amtrak's present request may not be "necessary" to effectuate the lease termination ruling, the plain language of the Declaratory Judgment Act does not require this degree of stringency. The relief need only be proper.

843 F.2d 546, 548 (D.C. Cir.) (emphasis added), cert. denied, 109 S. Ct. 129 (1988).

In this case, the reimbursement of defense costs paid by Omaha on the Cardons' behalf constitutes proper relief based on the declaratory judgment that Omaha was not, in fact, required to defend the Cardons under their policy.

III

As to the merits, the Cardons argue that the district court erred in awarding Omaha reimbursement of the defense costs it incurred on their behalf. They assert that Omaha's reservation of rights letter merely indicates Omaha's reservation of its right to sue the Cardons for reimbursement. Because Omaha has no right to reimbursement absent some agreement created by the letter, the Cardons argue, Omaha's reservation of a right to sue is of little use to Omaha. Instead, it is argued, Omaha must establish that the Cardons actually agreed to reimburse Omaha if it was determined that Omaha had no duty to defend them.

California law governs this appeal. A review of the cases demonstrates that they do not require the legal hair-splitting proposed by the Cardons. Instead, they support the district court's decision that Omaha "adequately reserved its right to recovery of litigation expenses in the consolidated actions."

California caselaw permits an insurer to act on behalf of the insured while reserving its own right to deny coverage at a later time. See Gray v. Zurich Ins. Co., 54 Cal. Rptr. 104 (1966); Johansen v. California St. Auto Ass'n Inter-Ins. Bur., 123 Cal. Rptr. 288 (1975). In fact, in Johansen, the Supreme Court of California stated that

[i]f, having reserved its rights and having accepted a reasonable offer [in settlement], the insurer subsequently established the noncoverage of its policy, it would be free to seek reimbursement of the settlement payment from its insured.

123 Cal. Rptr. at 294. Thus, the insurer need not face the dilemma of having to choose whether to deny coverage and later be found to have breached a duty owed to the insured or to defend or indemnify the defendant and in so doing waive its right to deny coverage or to seek reimbursement of funds spent on the insured's behalf. Id.

However, to recover litigation costs incurred on the insured's behalf, the insurer must establish an agreement or understanding between the parties. See Insurance Co. of the West v. Haralambos Bev. Co., 241 Cal. Rptr. 427, 432 (App.1987). For instance, in Val's Painting & Drywall, Inc. v. Allstate Ins. Co., 126 Cal. Rptr. 267 (App.1975), the court denied the insurer reimbursement for amounts paid in settlement. The court discussed Johansen, but held that "in this case, the letter sent by Allstate to Val's is insufficient, without more, to constitute the agreement contemplated by Johansen. Nowhere does the letter expressly state that if Allstate settled the case it would look to Val's for reimbursement for any reasonable amounts paid." Id. at 274 (emphasis added).

In fact, in each of the cases that the Cardons cite for having denied reimbursement, the court relied on the failure of the insurer to even mention reimbursement in its reservation of rights letter. See, e.g., Val's Painting & Drywall, Inc., 126 Cal. Rptr. at 274; St. Paul Mercury Ins. Co. v. Ralee Eng'g Co., 804 F.2d 520, 522 (9th Cir. 1986); Travelers Ins. Co. v. Lesher, 231 Cal. Rptr. 791, 809 (App.1986); Haralambos, 241 Cal. Rptr. at 428-29. For example, as described above, the insurer in Val's failed to "expressly state that ... it would look to Val's for reimbursement." 126 Cal. Rptr. at 274. In St. Paul, the court noted that the letter failed to mention reimbursement and that " [i]ndeed, the language of St. Paul's letter to its insured, reserving its rights and stating that it might 'refuse to defend you further at any future time' (emphasis supplied), suggests a contrary understanding." 804 F.2d at 522. Similarly, in Travelers Ins. Co., the letter not only "made no mention that Travelers intended to require Lesher to reimburse it for attorneys' fees and costs should it prevail on the coverage dispute," but the insurer's own claims representative, who sent one of the reservation of rights letters to Lesher, testified that "he did not intend to advise Lesher that Travelers would seek reimbursement of fees." 231 Cal. Rptr. at 809.

None of these cases requires the language that the Cardons suggest. Instead, Johansen states that under a reservation of rights the insured "would be free to seek reimbursement." 123 Cal. Rptr. at 294 (emphasis added). Val's requires the letter to "expressly state that [the insurer] would look to [the insured] for reimbursement." 126 Cal. Rptr. at 274 (emphasis added). Similarly, in Travelers Ins. Co., the court noted that the reservation of rights "made no mention that [the insurer] intended to require the insured to reimburse it." 231 Cal. Rptr. at 809. The court also discussed other evidence of the insurer's intent "to seek recovery." Id.

St. Paul comes the closest to supporting the Cardons' position in holding that "the record does not reflect an understanding between the parties that [the insured] would reimburse the [insurer]...." 804 F.2d at 522. However, as previously stated, the insurer in that case failed to even mention reimbursement in its reservation of rights. In its letter, the insurer stated that:

For the foregoing reasons, in undertaking your defense, or conducting any investigation it is to be clearly understood we are not waiving any right we have to deny coverage or refuse to defend you further at any future time, and we hereby specifically reserve our right to do so without prejudice to any other rights you or we may have under the policy.

804 F.2d at 522. This language provides absolutely no indication that the insurer intended to seek reimbursement of the money expended defending the insured. In fact, as we stated

the language of [the insurer's] letter to its insured, reserving its rights and stating that it might 'refuse to defend you further at any future time' (emphasis supplied), suggests a contrary understanding.

Id. Consequently, we held that the insurer was not entitled to reimbursement. However, as there was no language in the reservation of rights letter addressing reimbursement, we made no determination regarding the specificity of the language needed to effectively reserve a right to reimbursement.

Further, in Maryland Cas. Co. v. Imperial Contracting Co., 260 Cal. Rptr. 797 (App.1989), a California court of appeals recently held that an insurer had adequately reserved its right to reimbursement for amounts expended in settlement. In a reservation of rights letter, the insurer stated that "Maryland does intend to continue its action to recover any money it expends in settlement and attorney fees and costs." Id. at 800 (emphasis added). Consequently, the court held that "under these circumstances the insurer is entitled to seek to recover from the insured the amount expended in the settlement." Id. at 799.

In this case, under threat of suit, Omaha agreed to defend the Cardons but reserved its right to deny coverage at a later time and expressly reserved its right to seek reimbursement:

We will continue, as we have done to date, to provide your defense in the District Court Actions by counsel of your choosing, subject to the reservations set forth herein and until such time as the Court has adjudicated your right to such defense or to indemnification through the Omaha Indemnity Policy.

Additionally, Omaha Indemnity specifically reserves its right to seek reimbursement of all defense costs, including attorney's fees, paid to or on behalf of Wilford Cardon, Craig Cardon, Elijah Cardon or Cardon Oil Company with respect to the District Court Actions....

This language is virtually identical to that suggested in Johansen's, and quite consistent with that suggested in other cases, including Val's and Travelers Ins. Co. These cases, as well as the recent decision in Maryland Casualty, support the district court's conclusion that Omaha's letter constitutes an adequate reservation of rights to entitle it to reimbursement of the amounts it has expended in defending the Cardons.1 

AFFIRMED.

 *

The Honorable Albert Lee Stephens, Jr., United States District Judge for the Central District of California, sitting by designation

 **

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Cir.R. 36-3

 1

We need not address Omaha's estoppel and restitution theories. However, it is doubtful that Omaha could prevail on either. With regard to estoppel, Omaha cites no cases to support its argument. Further, the Cardons' silence is hardly "a promise which induces action." As to restitution, the cases are clearly against Omaha, holding that in these situations an insurer is acting in its own interest in defending the insured and, therefore, restitution is not available. See Travelers Ins. Co., 231 Cal.Rptr. at 809-10; Haralambos, 241 Cal. Rptr. at 434-35