Bodell v. Walbrook Insurance

119 F.3d 1411, 97 Daily Journal DAR 9182, 97 Cal. Daily Op. Serv. 5689, 1997 U.S. App. LEXIS 17813

• Court: Court of Appeals for the Ninth Circuit
• Decided: July 17, 1997
• Docket: No. 94-56708
• Status: Published

Opinions

MICHAEL DALY HAWKINS, Circuit Judge.

We consider here a question of first impression in this Circuit: whether an insurance policy promising to provide representation in “any proceeding or suit brought by any governmental regulatory agency seeking non-pecuniary relief’ obligates the insurer to provide representation during an investigation by agents of the United States Postal Inspection Service (“the Postal Inspection Service”) into allegations of mail fraud on the insured’s part. Under the particular wording of the policies at issue, we hold that the insurers here made a promise they are obligated to keep.

Plaintiff Gregory S. Bodell (“Bodell”), an attorney, was an insured under two claims-made professional liability insurance policies issued by defendants, Walbrook Insurance Company, et al. (“the carriers”). Bodell brought this action seeking to compel the carriers to pay attorneys fees and costs incurred as the result of a federal investigation into events arising out of his actions and activities as a practicing lawyer. The investigation ultimately matured into a criminal charge to which he pled guilty.

The district court granted summary judgment in the carriers’ favor. We have jurisdiction pursuant to 28 U.S.C. § 1291. Reviewing the district court’s grant of summary judgment de novo, Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir.1995), we reverse and remand to the district court for entry of judgment in Bodell’s favor.

BACKGROUND

In late 1988, agents of the Postal Inspection Service began an investigation focusing on a network of Southern California lawyers who, it was alleged, had used the U.S. mails to engage in a scheme to defraud insurance companies by needlessly and intentionally expanding and prolonging personal-injury litigation in order to collect higher fees.

Bodell was notified that he was a target of this investigation and he promptly requested that the carriers provide him with representation. The carriers refused and Bodell brought this action seeking a declaration that the carriers were obligated to defend him.

Shortly after Bodell moved for summary judgment, a federal grand jury handed up a criminal indictment against him, his direct supervisor, and others. Bodell subsequently cooperated with the federal government and entered a plea of guilty to a single count of aiding and abetting mail fraud.¹

The carriers then counterclaimed against Bodell in the civil action, seeking rescission of the policies. The district court denied Bodell’s motion for summary judgment and sua sponte granted summary judgment in favor of the carriers. Bodell appealed. Another panel of this court dismissed the appeal for lack of jurisdiction, explaining that the order was not a final decision within the meaning of 28 U.S.C. § 1291 because it did not dispose of the counterclaims and the district court did not enter judgment as to all the parties.

On remand, additional counterclaims and several cross-claims were filed and new parties were added to the suit. The district court thereafter granted summary judgment on the carriers’ counterclaims on grounds identical to those supporting its earlier grant of summary judgment against Bodell. Final judgment was entered on November 9, 1994, and Bodell timely appealed.

ANALYSIS

We are guided in our approach by California law, which teaches that insurance policies are to be broadly construed to afford the greatest possible protection to the insured. State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 109 Cal.Rptr. 811, 816, 514 P.2d 123, 128 (1973). “The policy should be read as a layman would read it and not as it might be analyzed by an attorney or an insurance expert.” Crane v. State Farm Fire & Cos. Co., 5 Cal.3d 112, 95 Cal.Rptr. 513, 514, 485 P.2d 1129, 1130 (1971). If any reasonable interpretation of the policy would result in coverage, a court must find coverage even if other reasonable interpretations would preclude coverage. State Farm Mut. Auto. Ins. Co. v. Jacober, 10 Cal.3d 193, 110 Cal.Rptr. 1, 2, 514 P.2d 953, 954 (1973).

The two policies at issue contain identical relevant provisions. The carriers agree to pay “all Claim expenses and all sums that the Insured shall become legally obligated to pay as Damages as a result of Claims first made against the Insured ... by reason of any act, error or omission in Professional Services rendered or which should have been rendered by the Insured.” “Claim” is defined in the policies as “a demand received by the Insured for money or services,” and “Damages” is defined as “a monetary judgment, award or settlement and includes punitive damages where deemed insurable by law.” It is conceded that the proceedings at issue did not involve a demand for money or services and that Bodell did not become legally obligated to pay a monetary judgment, award or settlement within the meaning of the policies. See Jaffe v. Cranford Ins. Co., 168 Cal.App.3d 930, 214 Cal.Rptr. 567, 570 (1985) (“[Njeither imprisonment nor a fine constitutes ‘damages’ for insurance purposes.”).

This does not end our inquiry. Both policies also provide: (emphasis added). Thus, it is clear that the policies provide a defense even when the insured could not possibly be held hable for damages within the meaning of the policy.² Consequently, the resolution of this appeal depends on whether the Postal Inspection Service investigation and subsequent grand jury proceedings can reasonably be considered a “proceeding or suit brought by any governmental regulatory agency seeking non-pecuniary relief.”

With respect to the insurance afforded by this policy, the Company shall defend any Claim against the Insured seeking damages to which this insurance applies even if any of the allegations of the Claim are groundless, false or fraudulent. The Company shall also defend any proceeding or suit brought by any governmental regulatory agency seeking non-pecuniary relief and any proceeding or suit seeking declaratory or injunctive relief except when brought by the Company.

1. Governmental Regulatory Agency

Is it reasonable for an insured to believe the proceedings in this case were brought by a “governmental regulatory agency”? The United States Postal Service (“the Postal Service”) is charged with the responsibility of providing for “the collection, handling, transportation, delivery, forwarding, returning, and holding of mail, and for the disposition of undeliverable mail.” 39 U.S.C. § 404(a)(1). To carry out that responsibility, the Postal Service is entrusted with the authority to “adopt, amend, and repeal such rules and regulations as it deems necessary to accomplish the objectives of this title.” 39 U.S.C. § 401(2).

Under the Private Express Statutes (“PES”), the Postal Service exercises a monopoly over the carriage of letters in and from the United States. Air Courier Conference v. American Postal Workers Union, 498 U.S. 517, 519, 111 S.Ct. 913, 915, 112 L.Ed.2d 1125 (1991) (citing 18 U.S.C. §§ 1693-1699 and 39 U.S.C. §§ 601-606). Accordingly, the regulations promulgated by the Postal Service establish standards for and govern the general public’s use of the nation’s mail delivery service. In addition, under 39 U.S.C. § 601(b), the Postal Service is authorized to suspend its monopoly “where the public interest requires.” Pursuant to that authority and its general enumerated powers, the Postal Service has promulgated regulations governing mail delivery by private carriers. See 39 C.F.R. §§ 310-320. Because it regulates both the delivery of mail by private carriers and the general public’s use of the mail delivery system, we conclude that it is not unreasonable to believe that the Postal Service is a regulatory agency.

Nor is our conclusion altered because the action was actually initiated by the Postal Inspection Service. The Postal Inspection Service is merely a branch of the Postal Service, charged generally with inspection and enforcement duties, with respect to laws “related to the Postal Service, the mails, other postal offenses and other laws of the United States.” 39 C.F.R. § 224.3(b)(2). Hence, it is not unreasonable to believe that a proceeding initiated by the Postal Inspection Service is a proceeding brought by a “governmental regulatory agency.”

The carriers contend that, in actuality, the proceedings here were not “brought” by the Postal Service or the Postal Inspection Service but by the United States Attorney. There is no question but that the United States Attorney is the gatekeeper of the federal grand jury. But a definition of “brought” that does not account for the work done by federal agents before a formal grand jury proceeding is undertaken is far too rigid for purposes of interpreting the policies in this case. In the civil context, that a complaint is drafted and filed by an attorney does not mean the action was not “brought” by the plaintiff as that term is commonly understood.

Our interpretation of “brought” is supported by the Fourth Circuit’s decision in Joseph P. Bornstein, Ltd. v. National Union Fire Ins. Co., 828 F.2d 242, 245 (4th Cir.1987). In that case, plaintiff was insured under a professional liability policy. Plaintiff was informed of a grand jury investigation targeting him for alleged tax law violations, he was indicted, and the indictment was subsequently dismissed. At some point, plaintiff requested National Union to undertake his defense pursuant to a provision of his policy stating National Union would “defend any proceeding or suit brought by any government regulatory agency seeking nonpeeuniary relief.” Id. at 243. National Union refused, claiming that the grand jury could not be viewed as a governmental agency and its purpose was not to seek nonpecuniary relief. Bornstein argued that “the investigation of his alleged tax law violations was instituted and directed by the Internal Revenue Service and the Department of Justice, both of which are government agencies.” Id. at 244. The Fourth Circuit found both constructions of the policy language to be reasonable and resolved the ambiguity in favor of Bornstein, the insured, in accordance with Virginia law, thereby finding a duty to defend.

Here, it appears that the Postal Inspection Service began a proceeding (an investigation) into activities (mail fraud) covered by the policies at issue. At some point, the Postal Inspection Service involved the United States Attorney’s Office in the matter. An affidavit of the Assistant United States Attorney (“AUSA”) assigned to the case seems to confirm this. In that affidavit, the AUSA asserts, “I am a duly appointed Assistant United States Attorney and have been assigned primary responsibility for assisting the United States Postal Inspector Service and the Federal Grand Jury in an investigation____” (emphasis added). Later in the same affidavit the AUSA continues, “The failure to stay [civil] proceedings could seriously jeopardize the fact-finding process now being undertaken by the Federal Postal Inspector Service and the Federal Grand Jury.” (emphasis added). While these characterizations by no means define the exact contours of the relationship between the Postal Inspection Service and the grand jury, we do find that this evidence supports the reasonableness of Bodell’s reading of the policy. Therefore, we hold that, under the terms of the policy, the action was “brought” by a governmental regulatory agency.

Next, we must determine whether it is reasonable for an insured to believe that an investigation that matures into a federal grand jury proceeding is one brought for “non-pecuniary relief.” A federal criminal investigation is just that: an investigation into facts. Simply because an AUSA is consulted or a grand jury convenes does not mean an indictment will inevitably result.³ It does not become a criminal proceeding until and unless an indictment is returned. Even if it somehow were a criminal proceeding, a reasonable insured might still believe the proceeding to be non-pecuniary in nature.

Moreover, even if we were to consider a resulting criminal proceeding seeking restitution in addition to incarceration to be one for both pecuniary and non-pecuniary relief, the carriers’ agreement to provide a defense for the non-pecuniary portion of the proceeding would have required them to provide a defense for the pecuniary portion of the proceeding as well. Cf. Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 17 Cal.Rptr.2d 210, 214, 846 P.2d 792, 796 (1993) (“Once the defense duty attaches, the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered, until the insurer produces undeniable evidence supporting an allocation of a specific portion of the defense costs to a noncovered claim.”).

2. California Public Policy

The carriers contend that, even if the policy language could otherwise properly be interpreted as affording a defense, California law prohibits them from paying for representation in these circumstances.⁴ The carriers cite California Insurance Code § 533.5(b):

No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to Chapter 5 (commencing with Section 17200) of Part 2 of, or Chapter 1 (commencing with Section 17500) of Part 3 of, Division 7 of the Business and Professions Code in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel, notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy.

Conspicuously absent from this list is any mention of any federal agency or officer, including the United States Attorney. Nonetheless, the carriers seek a reading of the statute that would prohibit an insurance policy from being construed as providing a duty to defend in any criminal action, even one brought by a federal official. A more natural reading of the statute is that the phrase “sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel” modifies both “any criminal action or proceeding” and “any action or proceeding brought pursuant to [certain chapters of the Business and Professions Code],” and that the statute therefore only precludes the tender of a defense in all criminal actions and certain civil actions brought by state, county or city officials.

The legislative history of the statute supports this interpretation. The original version of § 533.5, formulated in 1988, applied to “any claim in any civil or criminal action or proceeding” brought by a state or local prosecutorial agency. Assembly Bill 3920, Reg. Sess. § 1 (Cal.1988).⁵ The word “civil” precedes the word “criminal” and the “criminal” action referred to is clearly one brought by a state or local prosecutorial agency. Moreover, the legislative counsel’s digest to the original version states: “This bill would prohibit insurance coverage or indemnity for the payment of any fine, penalty, or restitution in any civil or criminal action or proceeding brought by specified law enforcement entities .... ” Legislative Counsel’s Digest, Assembly Bill 3920, Reg. Sess. (Cal.1988). According to Patrick Johnson, Chairman of the Assembly Committee on Finance and Insurance, when the law passed in 1988, the purpose of the bill was to prohibit insurance companies from indemnifying insureds against proceedings brought by the state and local regulatory agencies specified in the statute. California Legislature, Assembly Final History, Volume II, at 1 (1987-88).

In 1990, § 533.5 was revised. The statute was narrowed to apply just to specified sections of the Business and Professions Code.⁶ Assembly Bill 3334, Reg. Sess. § 1 (Cal. 1990). In the revised statute, the phrase “any claim in any criminal action or proceeding” was placed in front of the narrowed definition of the “civil” proceeding affected by the statute. This change in the order of the phrases referring to “criminal” and “civil” proceedings was not, as the carriers contend, an attempt to expand the “criminal” clause to include any actions by any prosecutorial agency. More likely, it was an effort to make the revised statute clear by not burying the “criminal” clause behind all the “Chapter” and “Section” information of the newly revised and narrowed “civil” clause. Again, the legislative history supports this interpretation: The heading above the statute restates the same “any civil or criminal action or proceeding” language found in the 1988 statute. Legislative Counsel’s Digest, Assembly Bill 3334, Reg. Sess. (Cal. 1990). Also worth noting is that when § 533.5 was revised yet again in 1991, the introduction of the bill was changed only by adding a reference to another local prosecutorial agency— the “county counsel.” Legislative Counsel’s Digest, S. 709, Reg. Sess (Cal.1991).

The carriers further claim that Bank of the West v. Superior Court, 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 539, 833 P.2d 545, 546 (1992), effectively rejects Bodell’s argument that the list of state and local regulatory agencies contained in § 533.5 is exhaustive. To the contrary, Bank of the West’s interpretation of § 533.5 is consistent with Bodell’s:

As originally enacted, section 533.5 did not even refer to the [Unfair Business Practices Act]. Instead, it barred coverage in all civil and criminal actions, whatever the theory of liability, brought by the Attorney General, a district attorney, or a city prosecutor. In 1990, the Legislature limited the statute’s reach to criminal actions and actions under the Unfair Business Practices Act.

Id. (citations omitted).

Not only does the statute not address a criminal proceeding brought by a federal official, but the California Supreme Court has recognized that “on its face this provision does not apply to relief sought by the federal government.” AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 274 Cal.Rptr. 820, 842 n. 15, 799 P.2d 1253, 1275 n. 15 (1990). After AIU was decided, the legislature amended § 533.5 to include actions brought by “any county counsel” but failed to include actions brought by United States Attorneys. It is not our role to “fill in the gaps” when the legislature had so clear an opportunity to do so. We are judges, not legislators.

The carriers also contend that the policies at issue should not be interpreted as providing Bodell a defense in light of the California legislature’s “numerous expressions of the strong public policy prohibiting insurance against the consequences of wilful and intentional wrongdoing.” Specifically, the carriers rely on California Civil Code § 1668, which states that contracts that “have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.” Although § 1668 has been construed as prohibiting an insurer from indemnifying an insured for liability caused by his or her wilful misconduct, see Maxon v. Security Ins. Co., 214 Cal.App.2d 603, 29 Cal.Rptr. 586, 592 (1963), neither § 1668 nor the ease law suggests that providing representation to an individual in a proceeding involving such conduct violates public policy. Gray v. Zurich Insurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168 (1966), teaches that an insurer has a duty to defend in a civil assault action despite the contention that such a construction of the policy would violate California public policy. The California Supreme Court explained:

[Insurance Code § 533 and Civil Code § 1668] forbid only contracts which indemnify for “loss” or “responsibility” resulting from wilful wrong-doing. Here we deal with a contract which provides for legal defense against an action charging such conduct; the contract does not call for indemnification of the insured if the third party plaintiff prevails. In the second place, as we pointed out in Tomerlin v. Canadian Indemnity Co., 61 Cal.2d 638, 648, 39 Cal.Rptr. 731, 737, 394 P.2d 571, 577 (1964), the statutes “establish a public policy to prevent insurance coverage from encouragement of wilful tort.” Thus Tomerlin held that if an insurer’s obligation to pay a judgment based on wilful conduct results from an estoppel after the conduct, the obligation could not have previously encouraged the conduct. Similarly, the present contract does not offend the statute; a contract to defend an insured upon mere accusation of a wilful tort does not encourage such wilful conduct.

Id. 54 Cal.Rptr. at 113, 419 P.2d at 177. As in Gray, the contract in this ease “does not offend the statute,” for a contract to defend an insured in a criminal proceeding “does not encourage” criminal conduct. Id.

CONCLUSION

We recognize that it is well established under California law that an insurer is not obligated to defend criminal proceedings when its policy covers only claims seeking “damages.” See Jaffe, 214 Cal.Rptr. at 570. The policies in this case, however, differ significantly because they specifically provide a duty to defend not only when there is a claim for damages but also when a governmental regulatory agency institutes a proceeding seeking non-pecuniary relief.

We find a reasonable insured could believe that the policies in question provide representation in the context of an investigation and resulting grand jury proceeding brought by a branch of an agency with regulatory powers such as the United States Postal Service. A reasonable insured could also believe that a resulting proceeding (here, the grand jury proceeding) is “brought” by the Postal Service notwithstanding the somewhat obtuse and little understood relationship between an agency and the United States Attorney.⁷ Finally, an agreement to defend under such circumstances is not violative of California law or policy. Consequently, the carriers had a duty to defend Bodell in these proceedings. Therefore, Bodell, not the carriers, is entitled to summary judgment, and upon remand the district court shall enter judgment in BodeU’s favor both on his complaint and the carriers’ counterclaims.

REVERSED AND REMANDED.

2 . The carriers contend the duty to defend is only triggered if coverage is found under the Insuring Clause, and that there cannot be coverage under this clause because the criminal action did not seek damages within the meaning of the policy. This contention fails for several reasons. Most notably, if such were the case, the duty to defend when a governmental regulatory agency institutes a proceeding or suit seeking non-pecuniary relief would be illusory, for a proceeding for non-pecuniary relief will never involve a claim for damages, as that term is defined by the policy.

3 . The United States Attorneys' Manual acknowledges as much. See United States Attorneys’ Manual § 9-11.101 (1988).

4 . The dissent broadly asserts that “no California court has ever construed an insurance policy to cover criminal defenses.” (dissent at p. 1421). But the cases it cites for support are inapposite. They do not contain language like that at issue here, but rather involve policies that promise to defend an insured only for "damages" covered under the respective agreements. Accordingly, those cases do not hold that an insurance policy can never cover criminal defenses, but that the insurers there had no duty to defend suits that did not seek recovery of damages covered by their policies. See Perzik v. St. Paul Fire & Marine Ins. Co., 228 Cal.App.3d 1273, 279 Cal.Rptr. 498, 500 (1991) (“An insurer is not obligated to defend a suit which does not seek the recovery of damages covered by the claimant’s policy.”); Jaffe, 214 Cal.Rptr. at 570 ("[W]here there is no potential for coverage, there is no duty to defend.”).

5 . The 1988 version provided:

(b) No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any civil or criminal action or proceeding in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, or any city prosecutor, notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy.

(emphasis added).

6 . The 1991 version read:

(b) No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any criminal action or proceeding brought pursuant to [specified sections of the Business and Professions Code] in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, or any city prosecutor, notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy.

7 . The AUSA's own affidavit refers to the Postal Inspection Service as engaging in a factfinding process together with the grand jury.