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September 29.2009

Ninth Circuit Refuses to Overturn Award to Insured, Bad Faith Action Still Pending

by Amanda Hairston

The City of Long Beach got some good news earlier this month when the Ninth Circuit rejected the insurer’s petition for rehearing in its insurance coverage dispute with the Insurance Co. of the State of Pennsylvania.  The court’s initial ruling upheld the decision of the district court to award $8 million to the city arising out of a 2004 housing discrimination lawsuit.  That suit, which involved allegations that the city tried to prevent a woman and her son from building boarding homes for Alzheimer’s patients in wealthy neighborhoods by issuing numerous building code citations, resulted in a $22.5 million jury verdict against the city.  The city appealed the award but eventually settled for $20 million.  Having satisfied the $12 million deductible, the city sought $8 million in coverage from its E&O carrier.  Ultimately, a district court judge in the Central District of California granted the city $6.2 million on its motion for partial summary judgment and $1.8 million in a bench trial. 

The City of Long Beach initiated the Ninth Circuit appeal, challenging the district court’s holding that the award of plaintiffs’ attorneys’ fees in the underlying housing discrimination suit did not qualify as “damages” and thus was not covered by the policies.  In return, the insurer cross-appealed, arguing that the district court’s finding that the city was entitled to overage under the policies at all was incorrect.   

On the city’s claim, the Ninth Circuit found that the E&O policies covered “ultimate net loss,” which is the amount the insured must pay “as damages by reason of a judgment or a settlement.”  On de novo review, the Ninth Circuit held that the award of attorneys’ fees in the underlying action did constitute “damages” under California law.  The court cited an analogous decision in Golden Eagle Ins. Co. v. Ins. Co. of the West., 99 Cal. App. 4th 837, 842 (Cal. Ct. App. 2002), which held that attorneys’ fees are “damages” within the meaning of a contractual indemnity clause as well as the general proposition from the California Supreme Court decision in AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 822 (Cal. 1990) that when language in a policy remains ambiguous even after the expectations of the parties have been considered, the ambiguity is generally resolved in favor of coverage. Since “damages” was not defined by the policies, the court found the attorneys’ fees were covered.

With respect to the insurer’s arguments, the coverage dispute centered on the “expected or intended” exclusion.  The insurer argued that the city employees, who were also named as individual defendants, had acted intentionally and therefore could have reasonably expected or intended the harm that resulted.  The Ninth Circuit rejected this argument and upheld coverage for the city as an insured under the policy.  The court found that the city itself did not intentionally cause the harm suffered by the plaintiffs in the underlying action even if the city employees had acted intentionally.  Also, since the individual city employees were not authorized to act or make policy on behalf of the city, the city was only vicariously, not directly, liable.  As a result, the Ninth Circuit affirmed the district court’s findings that the harm was neither “expected or intended” from the standpoint of the city and that the city was entitled to collect under the policies.

The City of Long Beach now stands to recoup even more of its losses - the city’s bad faith claim, which was stayed pending the outcome of the Ninth Circuit’s decision, will likely go forward. 

The district court case is case number 2:04-cv-08650-R-RZ, in the U.S. District Court for the Central District of California.

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