Leslie Salt Co. v. St. Paul Mercury Insurance

637 F.2d 657, 1981 U.S. App. LEXIS 18791

• Court: Court of Appeals for the Ninth Circuit
• Decided: March 30, 1981
• Docket: Nos. 78-2576, 78-2649
• Status: Published

Opinions

EUGENE A. WRIGHT, Circuit Judge:

Upon petition for rehearing, the opinion filed on October 29, 1980 is withdrawn and replaced by the following disposition.

We must decide whether the trial court correctly ruled (1) that Leslie’s loss was covered by its policy with St. Paul and (2) that St. Paul breached its duty of good faith by denying coverage and forcing Leslie to litigate. We also must determine whether the trial court, properly calculated damages and attorneys’ fees. We affirm on all counts except the attorneys’ fee award.

FACTS

Leslie manufactures salt in Port Hedland, Australia. Part of the process entails removing salt from seawater and stacking it for drying. Stacking is done with a radial stacker, a huge machine that moves along a rail collecting salt from the ground and, in a circular motion, deposits it in piles.

On August 15, 1973 Leslie employees noticed a bend in the rail. Having repaired it, they drove the stacker on a test run. The stacker buckled, collapsed and was totally destroyed. Leslie promptly notified St. Paul of the loss. Citing a policy provision that excludes coverage for damage to property while being repaired,¹ St. Paul declined the claim. Leslie sought reconsideration, but the claim was again refused.

Leslie sued to recover (1) on the policy for loss of the stacker and (2) for all losses resulting from St. Paul’s wrongful refusal to pay the claim promptly. The jury found that St. Paul’s policy covered the loss and that St. Paul acted in bad faith in refusing the claim.

DISCUSSION

Standard of Review

We shall not disturb the jury’s factual findings unless they are clearly erroneous. F.R.Civ.P. 52(a). The correct construction of a contract provision such as a specific exclusionary clause is “a question of law subject to our de novo review.” Transport Indemnity Co. v. Liberty Mutual Insurance Co., 620 F.2d 1368, 1370 (9th Cir. 1980); State Farm Mutual Insurance Co. v. Partridge, 10 Cal.3d 94, 100, 109 Cal.Rptr. 811, 815, 514 P.2d 123, 127 (1973). We usually defer to the construction of state law by a district judge sitting in that state. The district court’s determination will be accepted on review unless shown to be clearly wrong. Clark v. Musick, 623 F.2d 89, 91 (9th Cir. 1980).

The Exclusions

St. Paul provided Leslie with “all-risk” coverage, i. e., it insured against loss from any cause whatsoever except those expressly excluded. Two of those exclusions are relevant here, and are reproduced in the margin.²

The vehicle exclusion is inapplicable. While St. Paul argues that the rail must have been injured by a bulldozer, this was not proved at trial. It is apparent that the jury’s verdict for Leslie meant that it found the damage was not caused by a vehicle. The finding of fact is binding on us.

The Repair Exclusion

St. Paul contends the loss fell within Exclusion I, set out in note 2, and hereafter referred to as the repair exclusion. Because this court independently reviews such exclusions as a question of law, we may briefly dispose of two subsidiary contentions. St. Paul argues that the trial court erred in admitting expert testimony on the nature of repair exclusions, and in instructing the jury to construe any ambiguity in Leslie’s favor. Because we shall construe the provision, it is immaterial whether the jury heard the testimony or was incorrectly instructed.

Under California law exclusions in insurance policies must be “clear and unmistakable” and must not “violate the reasonable expectation of the parties.” Middlesex Mutual Insurance Co. v. McCoy, 106 Cal.App.3d , 165 Cal.Rptr. 45, 50 (1980). Similarly, this court has stated:

An “all risks” policy creates a special type of coverage extending to risks not usually covered under other insurance, and recovery under an “all risk” policy will be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.

C. H. Leavell & Co. v. Fireman’s Fund Insurance Co., 372 F.2d 784, 787 (9th Cir. 1967) (emphasis in original).

We have studied the repair exclusion and conclude that it does not expressly exclude this loss. The clause excludes from coverage loss sustained “while the property is actually being worked upon.” At the moment of loss the stacker was being tested, not worked upon. The addition of the word “actually” to the clause compels this narrow reading.

We also conclude that the loss was not “caused by any repairing, adjusting or servicing.” We construe this phrase to exempt from coverage those losses actively brought about by negligent repairs but not losses passively allowed to occur by inadequate repair. Thus, while it is true that successful repair of the rail might have prevented loss of the stacker, it does not follow that inadequate repair caused the loss. Damage to the rail caused the stacker to buckle.

This construction is required to give effect to the intent of the parties. Had Leslie’s workmen not noticed the bend in the rail, or had they continued using the stacker despite it, the stacker would have collapsed and St. Paul would have been required to pay the resulting claim. It is unreasonable, and contrary to the parties’ intent, to penalize the insured for attempting to make repairs and thereby save St. Paul from a substantial claim. We hold that the repair exclusion does not apply to the instant loss.³

Measure of Damages

St. Paul argues that the court erred in instructing the jury:

In determining the actual cash value of the property damaged, it shall be as of the time of the commencement of the loss on August 15, 1973, and shall be ascertained according to such actual cash value with proper deduction for depreciation, however caused, and salvage value and shall in no event exceed what it would then cost Leslie to repair or replace the same with material of like kind and quality.

St. Paul cites Jefferson Insurance Co. v. Superior Court, 3 Cal.3d 398, 90 Cal.Rptr. 608, 475 P.2d 880 (1970), for the proposition that “actual cash value” means fair market value, not cost of replacement. That rule, however, is not applicable when the insured property, a custom-built stacker, has no market. The law has long recognized that the actual cash value of property with no market may be measured with reference to the cost of replacement. See generally Annotation, “Insurance — Actual Cash Value,” 61 ALR2d 711 (1958); McCormick on Damages § 45 (1935).

Duty of Good Faith

Under California law

when an insurer “fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.”

Neal v. Farmers Insurance Exchange, 21 Cal.3d 910, 920, 148 Cal.Rptr. 389, 394, 582 P.2d 980, 985 (1978), (quoting Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 574, 108 Cal.Rptr. 480, 485, 510 P.2d 1032, 1037 (1973)). The question whether the insurer acted in good faith in rejecting a claim is one of fact for the jury whose finding must be affirmed if supported by substantial evidence. Neal, supra, 21 Cal.3d at 922, 148 Cal.Rptr. at 395, 582 P.2d at 986; Northwestern Mutual Insurance Co. v. Farmers Insurance Group, 76 Cal.App.3d 1031, 1053, 143 Cal.Rptr. 415, 428 (1978).

The jury found that St. Paul breached its duty of good faith by declining the claim. St. Paul contends that its refusal was reasonable in light of its sincere belief that the repair exclusion applied to the loss. It is correct that an honest dispute over policy coverage is not actionable. The question is whether a reasonable insurer, faced with this claim, would have acted as St. Paul did.

Leslie points to evidence of bad faith: (1) the repair, exclusion clearly does not- apply so the refusal was patently unreasonable and (2) after its initial refusal St. Paul duplicitously agreed to reconsider the claim. Leslie points to documentary evidence which reveals that St. Paul’s position was firmly fixed and reconsideration was a pretense to interview witnesses and collect evidence in preparation for litigation.⁴

While the evidence of bad faith may not be overwhelming, we cannot say it is wholly insubstantial. Under California law, “[w]here the evidence is conflicting or gives rise to conflicting inferences the findings of the trial court will not be disturbed on appeal.” Northwestern Mutual, supra, 76 Cal.App.3d at 1053, 143 Cal.Rptr. at 428. We affirm the finding of bad faith.

Inflation

St. Paul contends that the trial court erred in allowing the jury to inflate the damages to compensate Leslie for the change in value of dollars between 1973 and 1978. Here the district court took into consideration that: (1) there was a loss that could be compensated only by replacement cost; (2) there was bad faith on the part of the insurer; and (3) there was a steady rate of inflation during the compensable period. Given these circumstances, it was not error to allow the jury to use inflation as an element of damages.

The insurer’s tort of bad faith renders it liable “for all detriment proximately resulting therefrom, including economic loss .... ” Fletcher v. Western National Life Ins. Co., 10 Cal.App.3d 376, 401-02, 89 Cal.Rptr. 78, 94 (1970). Accord, Mustachio v. Ohio Farmers Ins. Co., 44 Cal.App.3d 358, 363, 118 Cal.Rptr. 581, 584 (1975).

Inflation loss is a proximate result of the insurer’s bad faith. The prospect that the claim will decline in value as the value of money declines is foreseeable, if not intended. Damages must reflect this loss if the plaintiff is to be fully compensated.

St. Paul argues that California law does not permit adjustment of damages for past inflation. We disagree. “California law has long approved consideration of the factor of inflation as a matter of economic reality.” Rodriguez v. McDonnell Douglas Corp., 87 Cal.App.3d 626, 662, 151 Cal.Rptr. 399, 419 (1979) (citations omitted). Past inflation, no less than future inflation, is “a matter of economic reality.” ■ Indeed, the past rate is considerably less speculative.

When state law principles support recovery, federal courts are not required to deny relief to litigants in diversity cases merely because no one has presented an identical claim in a state court. See Hackbart v. Cincinnati Bengals, Inc., 601 F.2d 516, 523 (10th Cir.) (“for every injury wrongfully inflicted, some redress under state common law must be afforded since it is essential that citizens be able to look to their government for redress”), cert. denied, 444 U.S. 931, 100 S.Ct. 275, 62 L.Ed.2d 188 (1979).⁵

Finally, we note that the California courts have allowed damages for past inflation in a slightly different setting. In Camrosa County Water District v. Southwest Welding & Manufacturing Co., 49 Cal. App.3d 951, 123 Cal.Rptr. 93 (1975), the plaintiff, asserting breach of warranty, recovered the cost of repair as of the trial date. 49 Cal.App.3d at 954,123 Cal.Rptr. at 94. The court acknowledged that the damages reflected inflation between the date of breach and the date of trial, and upheld the award. 49 Cal.App.3d at 957-58, 123 Cal. Rptr. at 96. It would be anomalous to deny Leslie comparable damages simply because it replaced the stacker at its own expense prior to trial.⁶

Attorneys Fees

An insurer who wrongly refuses to pay a claim must compensate the insured for all damages caused by the refusal. When the insured must litigate its claim, counsel fees are part of its compensatory damages. Mustachio v. Ohio Farmers Insurance Co., supra, 44 Cal.App.3d at 364, 118 Cal.Rptr. at 584 (1975). See generally McCarthy, Punitive Damages in Bad Faith Cases 80 (2d ed. 1978). Because St. Paul wrongly denied coverage, Leslie had to employ counsel to recover its loss of the stacker, and it should recover attorneys’ fees incurred in recovering what was due it.

But California cases after Mustachio foreclose an award of fees for “legal services attributable to any portion of plaintiff’s recovery which exceeds the amount due under the policy.” Dinkins v. American National Ins. Co., 92 Cal.App.3d 222, 234, 154 Cal.Rptr. 775, 782 (1979). Accord, Twentieth Century-Fox Film Corp. v. Harbor Ins. Co., 85 Cal.App.3d 105, 112-15, 149 Cal.Rptr. 313, 318-19 (1978).⁷

We reverse and remand the award of attorneys’ fees. Pees should be awarded only for services attributable to recovery of the amount due under the policy and not for bad faith or its consequences, including inflation loss.

CONCLUSION

We determine that the repair exclusion does not apply to the instant loss, and we affirm the judgment that St. Paul must compensate Leslie for the loss of the stacker. Because substantial evidence supports the jury’s finding that St. Paul unreasonably denied coverage for the loss, St. Paul is also liable for any damages Leslie suffered by not receiving prompt payment for its loss in 1973, including the decreased value of money and attorneys’ fees incurred in recovering the amount due on the policy. Attorneys fees for the bad faith claim are not recoverable. The judgment is AFFIRMED in part, REVERSED and REMANDED in part.⁸

1 . St. Paul’s denial was based exclusively on the repair exclusion, reproduced at footnote 2, infra. Only during litigation did St. Paul urge that the vehicle exclusion applied.

2 . The relevant exclusions read:

“This policy does not insure . . . Loss Arising From: “A) Loss or damage covered by the insured’s Fire and Earthquake policy(s) nor in any event loss or damage caused by . .. Vehicles,

“1) Loss or damage sustained while the property is actually being worked upon and directly resulting therefrom or caused by any repairing, adjusting or servicing.”

3 . We need not decide whether the general rule that ambiguities are construed in favor of the insured applies to this policy, see, e. g., Harris v. Glens Falls Ins. Co., 6 Cal.3d 699, 701, 100 Cal.Rptr. 133, 134, 493 P.2d 133, 134 (1972) or whether the rule is inapplicable because this policy was not drafted by the insurer, see, e. g., Travelers Indemnity Co. v. United States, 543 F.2d 71, 74 (9th Cir. 1976).

4 . St. Paul’s agent, Mr. de Jonge, testified during his deposition that “the whole purpose [of the investigation] was to strengthen our denial position.” The jury might well have believed that the purported investigation for purposes' of reconsidering the claim was disguised trial preparation.

5 . In any event, “we are limited in our review of the district court’s interpretation of the law of the state in which it sits. We do not overrule a district judge on the question of state law unless the judge’s findings are ‘clearly wrong.’ ” Gee v. Tenneco, Inc., 615 F.2d 857, 861 (9th Cir. 1980) (citation omitted). We cannot say' that the district court’s interpretation of California law was “clearly wrong.”

6 . See also Tri-Delta Engineering, Inc. v. Insurance Co. of North America, 80 Cal.App.3d 752, 757, 146 Cal.Rptr. 14, 17 (1978) (jury considered past inflation; not an issue on appeal).

7 . Leslie contends that St. Paul waived the right to appeal the award of attorneys’ fees by failing to object to the award in the court below. Leslie also asserts that St. Paul failed to meet its burden of apportionment.

Prior to a hearing on the matter, St. Paul opposed Leslie’s motion for attorneys’ fees. At the hearing, St. Paul asked to cross-examine Leslie’s counsel, apparently for purposes of apportionment, but suggested that the court first specify the services for which fees could be awarded.

The court determined that fees could not be awarded for services related to the punitive damages claim and the claim against FM, and it then awarded the other fees sought. St. Paul did not pursue the matter further until this appeal.

Although St. Paul did not raise the issue as sharply as it might have, we believe that, under the circumstances, it preserved the right to appeal the fee award. Cf. Sheehy v. Southern Pacific Transportation Co., 631 F.2d 649, 652-53 (9th Cir. 1980) (objection during pretrial argument preserved appeal right even though evidence not challenged when admitted).

In any event, we have discretion to consider an issue not raised below when it comes to light during the pendency of an appeal through developments in the law. See Singleton v. Wulff, 428 U.S. 106, 121, 96 S.Ct. 2868, 2877, 49 L.Ed.2d 826 (1976); United States v. Patrin, 575 F.2d 708, 712 (9th Cir. 1978). Two California cases that clarified the applicable law, Din-kins and Fox Film, were decided after the proceeding below. Even if St. Paul had not adequately raised the issue in district court, we could appropriately consider it.

We also reject Leslie’s assertion that St. Paul failed to meet its burden of apportionment. St. Paul was not given an adequate opportunity to meet any such burden. In the absence of a clear ruling by the court excluding fees incurred in pursuing the bad faith claim, it would have been futile for St. Paul to attempt to apportion fees. On remand, however, St. Paul may face this burden. See Mustachio v. Ohio Farmer Ins. Co, 44 Cal.App.3d 358, 364 n.7, 118 Cal.Rptr. 581, 585 n.7 (1975).

8 . In view of our disposition of this action, Leslie’s conditional appeal against FM Insurance Company, No. 78-2649, is dismissed.