Unpublished Disposition, 927 F.2d 608 (9th Cir. 1982)

No. 89-55811.

United States Court of Appeals, Ninth Circuit.

Appeal from the United States District Court for the Central District of California; No. CV-84-2995-WPG, William P. Gray, District Judge, Presiding.

C.D. Cal.

AFFIRMED IN PART, REVERSED AND REMANDED IN PART.

Before WALLACE, Chief Judge, POOLE, Circuit Judge, and DAVID R. THOMPSON,^*  District Judge.

MEMORANDUM

We previously decided that Aetna Casualty and Surety Co., Inc. (Aetna) has a right of contribution against Centennial Insurance Co. (Centennial) for Aetna's defense of a mutually insured, International Identification, Inc. (International). See Aetna Casualty & Surety Co. v. Centennial Insurance Co., 838 F.2d 346 (9th Cir. 1988). Centennial now challenges the district court's equitable apportionment of the costs of the insured's defense. The district court had jurisdiction pursuant to 28 U.S.C. § 1332. We have jurisdiction pursuant to 28 U.S.C. § 1291. Centennial filed its notice of appeal within 30 days of the district court's entry of final judgment. See Fed. R. App. P. 4(a) (1). Although the judgment was later corrected pursuant to Fed. R. Civ. P. 60(a), this later correction did not upset the timeliness of Centennial's notice of appeal. See Hasbrouck v. Texaco, Inc., 879 F.2d 632, 636 (9th Cir. 1989). We affirm in part, and reverse and remand in part.

* This is a diversity action to which California substantive law applies. California law requires an equitable apportionment of defense costs between insurers each with a duty to defend. CNA Casualty v. Seaboard Surety Co., 176 Cal. App. 3d 598, 619-20, 222 Cal. Rptr. 276, 288-89 (1986) (CNA) . California has most typically apportioned these costs on the basis of relative coverage limits. See id. (citing cases). California has also, however, expressly declined to adopt a definitive rule for apportionment, emphasizing instead the trial court's broad discretion. Id. The apportionment may be adjusted to reflect other " 'varying equitable considerations which may arise, and which affect the insured and the ... carriers, and which depend upon the particular policies of insurance, the nature of the claim made, and the relation of the insured to the insurers.' " Id. at 619, 222 Cal. Rptr. at 289, quoting Signal Cos. v. Harbor Insurance Co., 27 Cal. 3d 359, 612 P.2d 889, 895, 165 Cal. Rptr. 799, 805 (1980) (Signal) . Thus, we review the district court apportionment for an abuse of discretion.

The district court order requires Centennial to pay two-thirds and Aetna one-third of the reasonable costs of International's defense. The district court based this apportionment on the coverage limits, $1,000,000 per policy, of two Centennial policies and one Aetna policy. It held that two subsequent Aetna policies, each with a $2,000,000 coverage limit, were beyond the scope of the litigation risk, and therefore, should not be considered in the apportionment.

Centennial concedes that defense costs may be apportioned on the basis of relative coverage limits. Centennial challenges, however, the district court's determination that only the first three policies were at risk. Centennial argues that all five policies were at risk and should be considered in the apportionment. Based on the coverage limits of all five policies, Centennial contends it should pay only two-sevenths while Aetna pays five-sevenths of the defense costs.

Centennial argues that Allflex's second amended complaint extended the duty to defend to Aetna's latter two policies. The district court held that it did not. The district court distinguished between a supplemental complaint, which would extend the duty to defend, and an amended complaint, such as here, which would not. An erroneous legal conclusion constitutes an abuse of discretion. Thus, this part of the district court's decision is subject to de novo review.

The duty to defend is broader than the duty to indemnify. CNA, 176 Cal. App. 3d at 605, 222 Cal. Rptr. at 278. It does not depend upon the technicalities of the pleaded cause of action. Id. at 606, 222 Cal. Rptr. at 280. Rather, the duty attaches to any potential liability arising from the facts contained in the complaint or otherwise known to the insurer. Id. at 605, 222 Cal. Rptr. at 279.

Whether we focus on the original or amended complaints, our conclusion is the same: the complaints allege that International was engaged in a series of wrongful acts. These factual allegations gave Aetna notice of the potential for liability under its latter two policies. We see no meaningful distinction between an amended and supplemental complaint, since the legal standard looks not to the form of the complaint but to the facts which it contains. The district court erred in its determination that Aetna's latter two policies were not subject to the duty to defend. Because the district court's apportionment relies on this erroneous legal conclusion, the apportionment must be reversed.

If we were to apportion the defense costs between all five policies on the basis of their relative coverage limits, Aetna would bear five-sevenths and Centennial two-sevenths of the reasonable defense costs. However, the district court's apportionment may have been made in light of other equitable considerations not specifically articulated in its order. Therefore, we remand. On remand, the district court has discretion to make an equitable adjustment to this apportionment.

Aetna urges us to adopt an alternative grounds for affirmance. It contends that the underlying liability arose out of a single continuing occurrence which is exempted from coverage under the latter two policies by Cal.Ins.Code Sec. 22 (West 1974). We do not address application of Cal.Ins.Code Sec. 22 to this dispute, because Aetna's contention is foreclosed by the district court's finding that the underlying liability arose out of a series of multiple occurrences. This is a factual finding which we will not disturb on appeal except to the extent it is clearly erroneous. Both parties have extensively briefed the question, but nothing either party has said convinces us that the district court's finding is clearly erroneous. Therefore, Aetna's contention fails.

II

The district court held that 20 percent of the total defense costs were unreasonable. These costs were apportioned equally between Aetna and Centennial. In making this apportionment, the district court reasoned that both insurers were equally responsible: Aetna was directly responsible as the insurer that had supervised the defense, and Centennial was chargeable for its refusal to participate.

Centennial characterizes this apportionment as a penalty imposed by the district court without proper authority. To the contrary, the district court acted pursuant to its obligation to consider " 'varying equitable considerations which may arise, and which affect the insured and the ... carriers, and which depend upon the particular policies of insurance, the nature of the claims made, and the relation of the insured to the insurers.' " CNA, 176 Cal. App. 3d at 619, 222 Cal. Rptr. at 289, quoting Signal, 27 Cal. 3d at 369, 612 P.2d at 895, 165 Cal. Rptr. at 805. Both the district court's reasoning and its result are well within this broad grant of discretion.

III

The district court found that Aetna formally notified Centennial of the litigation on August 27, 1982. It held that an insurer is not liable for prenotification defense costs, except when it refuses to participate in the defense. See Samson v. Transamerica Insurance Co., 30 Cal. 3d 220, 238, 636 P.2d 32, 43, 178 Cal. Rptr. 343, 354 (1981). The district court found Centennial's conduct tantamount to a refusal to defend, and thus, included in the apportionment defense costs incurred prior to formal notification on August 27, 1982.

Centennial does not dispute the district court's statement of the relevant law. It argues, however, that it did not refuse to defend International in the underlying litigation. This is a factual finding which we are bound to uphold if not clearly erroneous. Nothing in Centennial's briefs or argument convinces us that the district court's finding is clearly erroneous. Therefore, Centennial's argument fails.

IV

Finally, Centennial contends that it had no duty to defend against equitable claims in the underlying litigation. It relies upon policy language which provides for the indemnification of damages only. But, as we have already said, the duty to defend is broader than the duty to indemnify. CNA, 176 Cal. App. 3d at 605, 222 Cal. Rptr. at 278. This duty does not depend on a plaintiff's choice of legal theories; an insurer has a duty to defend if a plaintiff alleges facts which create the potential for liability. See id.

Centennial cites cases in which no duty arose due to the complete absence of claims even potentially covered by the policy. See, e.g., Nationwide Insurance Co. v. King, 673 F. Supp. 384 (S.D. Cal. 1987) (no duty to defend civil action seeking solely equitable relief not covered by the policy); State Farm Fire & Casualty Co. v. Superior Court, 191 Cal. App. 3d 74, 77, 236 Cal. Rptr. 216, 218 (1987) (no duty to defend criminal prosecution). These cases demonstrate the common sense law that if there is no potential for liability, there is no duty to defend. This is not, however, the proposition for which Centennial cites these cases to us.

Centennial argues that Nationwide and State Farm stand for a rule that an insurer need only partially defend a complaint including any cause of action beyond the scope of indemnification. No case cited by Centennial includes any such holding. Centennial has the duty to defend based on a plaintiff's factual allegations, not its choice of legal theories. Allflex alleged facts creating at least the potential for liability within the scope of Centennial's coverage. Thus, Centennial had a duty to defend the entire action.

V

The district court erred in its holding that only one of Aetna's three policies was placed at risk by the Allflex litigation. Because the apportionment of reasonable defense costs relied on this erroneous determination, we reverse and remand for further consideration. The district court's opinion is affirmed in all other respects.

Each side shall bear its own costs.

AFFIRMED IN PART; REVERSED AND REMANDED IN PART.