NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS MAR 7 2018 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT
MILLENNIUM LABORATORIES, INC., No. 16-55432
Plaintiff-Appellant, D.C. No. 3:12-cv-02280-BAS-KSC v.
ALLIED WORLD ASSURANCE MEMORANDUM* COMPANY (U.S.), INC.,
Defendant-Appellee.
Appeal from the United States District Court for the Southern District of California Cynthia A. Bashant, District Judge, Presiding
Argued and Submitted February 8, 2018 Pasadena, California
Before: REINHARDT, W. FLETCHER, and OWENS, Circuit Judges.
Plaintiff-Appellant Millennium Laboratories, Inc. (“Millennium”) appeals
from the district court’s grant of summary judgment to Defendant-Appellee Allied
World Assurance Co. (“Allied World”) on Millennium’s claims for breach of
contract, breach of the covenant of good faith and fair dealing, and declaratory
relief. As the parties are familiar with the facts, we do not recount them here. We
* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. have jurisdiction under 28 U.S.C. § 1291, and we affirm.
1. The question whether the policy required Allied World to
contemporaneously reimburse Millennium’s defense costs for potentially covered
claims is not moot. Had Allied World been obligated to reimburse defense costs
for any potentially covered claims from the time that they were incurred until those
claims were determined not to be covered, then Millennium would be entitled to
interest for any such costs withheld, even if, in the end, they would be subject to
recoupment by Allied World. Cal. Civ. Code § 3302; Oil Base, Inc. v. Transport
Indem. Co., 306 P.2d 924, 926 (Cal. Ct. App. 1957).
2. The policy was an indemnity-only policy, however, and therefore did not
require the contemporaneous advancement of Millennium’s defense costs. “D & O
policies are indemnity-only policies, whereby the insurer reimburses defense
expenditures only after the insured selects counsel, controls the defense, and
submits the defense bill.” Exec. Risk. Indem., Inc. v. Jones, 89 Cal. Rptr. 3d 747,
751 n.4 (Ct. App. 2009) (emphasis added). The language of the policy’s
reimbursement provision confirms this: it required Allied World, at Millennium’s
request, to “reimburse” defense costs. If, as Millennium contends, the policy were
a liability-type policy, then this provision would be surplusage, as the policy’s
coverage provisions would already have obligated Allied World to pay
Millennium’s defense costs as soon as they were incurred. See Okada v. MGIC
2 Indem. Corp., 823 F.2d 276, 280 (9th Cir. 1986); see also Cal. Civ. Code § 1641;
ACL Techs., Inc. v. Northbrook Prop. & Cas. Ins. Co., 22 Cal. Rptr. 2d 206, 213
(Ct. App. 1993).
3. Allied World’s duty to reimburse, moreover, applied only to claims actually
covered by the policy and did not extend to claims merely potentially covered.
“Unlike a comprehensive general liability policy, D & O policies are not written on
a ‘duty to defend’ basis.” Jones, 89 Cal. Rptr. 3d at 751 n.4. “Instead, defense
costs are defined as part of ‘Damages’ for which indemnification is to be paid.”
Health Net, Inc. v. RLI Ins. Co., 141 Cal. Rptr. 3d 649, 670-71 (Ct. App. 2012).
Such was the case here: the policy expressly disclaimed any duty to defend and
instead provided for coverage of defense costs only as an ingredient of covered
losses. And “in the absence of a contractual duty to defend, when defense costs are
recoverable only as covered losses, only those defense costs which were actually
related to the defense of covered claims may be reimbursed.” Id. at 671 (second
emphasis added).
4. The Department of Justice (“DOJ”) investigation did not constitute a single
“claim” for policy purposes. The policy’s definitions of “claim” are “concerned
with the temporal certainty of the ‘Claim,’” rather than with “its scope.” Id. at
672-73. Thus, the investigation is properly viewed as multiple claims, one for each
alleged “wrongful act,” “error, or omission” by an insured that the DOJ
3 investigated.
5. Millennium identifies seven alleged wrongful acts, errors, or omissions that
the DOJ investigated but that purportedly were not subject to the specific-claim or
pending-or-prior-litigation exclusions. Contrary to Millennium’s argument, the
record shows that five claims were excluded from coverage. As to the remaining
two, Millennium has failed to raise a triable issue as to whether they were covered
by the policy at all.
First, Millennium’s allegedly improper use of standing orders, sometimes
called “custom profiles,” to increase drug-testing orders was expressly alleged in
the Schur action and was therefore “related” to that litigation. Thus, any of
Millennium’s defense costs arising from the investigation of its allegedly improper
use of “custom profiles” were subject to the pending-or-prior-litigation exclusion.
Second, the DOJ’s investigation of Millennium’s “Section A issues”
“related” to the Schur action as well. The complaint in Schur alleged that
Millennium “did not require healthcare providers . . . to execute or properly fill out
the confirmation testing requisition indicating which positives and which negatives
if any, needed to be confirmed.” Thus, any defense costs arising from the
investigation of these alleged “Section A issues” were subject to the pending-or-
prior-litigation exclusion.
Third, although the record contains evidence indicating that Millennium did
4 not first speak to the DOJ about its allegedly improper “specimen validity testing”
until after the policy expired, Millennium has put forward no evidence that the
DOJ investigated this alleged wrongful act during the policy period. Thus,
Millennium has failed to show a triable issue over whether any defense costs
associated with the investigation of this alleged act were covered by the policy.
See Royal Globe Ins. Co. v. Whitaker, 226 Cal. Rptr. 435, 437 (Ct. App. 1986); see
also Jackson v. Bank of Haw., 902 F.2d 1385, 1389 (9th Cir. 1990).
Fourth, the DOJ’s investigation of alleged witness intimidation also related
to prior or pending litigation, namely the Ameritox action, which alleged
substantially the same intimidating conduct by Millennium employees as the
DOJ’s complaint in intervention. See Defendant Allied World Assurance Co.
(U.S.) Inc.’s Request for Judicial Notice in Support of Its Motion for Summary
Judgment at 190-91, Millennium Labs, Inc. v. Allied World Assurance Co., No.
3:12-CV-02280-BAS-KSC (S.D. Cal. May 23, 2014), ECF No. 161-4. Thus, the
DOJ’s investigation into this conduct “derived from the same or essentially the
same facts, or the same or related Wrongful Acts, as alleged” in the Ameritox
action. Any defense costs arising therefrom were therefore subject to the prior-or-
pending-litigation exclusion.
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NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS MAR 7 2018 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT
MILLENNIUM LABORATORIES, INC., No. 16-55432
Plaintiff-Appellant, D.C. No. 3:12-cv-02280-BAS-KSC v.
ALLIED WORLD ASSURANCE MEMORANDUM* COMPANY (U.S.), INC.,
Defendant-Appellee.
Appeal from the United States District Court for the Southern District of California Cynthia A. Bashant, District Judge, Presiding
Argued and Submitted February 8, 2018 Pasadena, California
Before: REINHARDT, W. FLETCHER, and OWENS, Circuit Judges.
Plaintiff-Appellant Millennium Laboratories, Inc. (“Millennium”) appeals
from the district court’s grant of summary judgment to Defendant-Appellee Allied
World Assurance Co. (“Allied World”) on Millennium’s claims for breach of
contract, breach of the covenant of good faith and fair dealing, and declaratory
relief. As the parties are familiar with the facts, we do not recount them here. We
* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. have jurisdiction under 28 U.S.C. § 1291, and we affirm.
1. The question whether the policy required Allied World to
contemporaneously reimburse Millennium’s defense costs for potentially covered
claims is not moot. Had Allied World been obligated to reimburse defense costs
for any potentially covered claims from the time that they were incurred until those
claims were determined not to be covered, then Millennium would be entitled to
interest for any such costs withheld, even if, in the end, they would be subject to
recoupment by Allied World. Cal. Civ. Code § 3302; Oil Base, Inc. v. Transport
Indem. Co., 306 P.2d 924, 926 (Cal. Ct. App. 1957).
2. The policy was an indemnity-only policy, however, and therefore did not
require the contemporaneous advancement of Millennium’s defense costs. “D & O
policies are indemnity-only policies, whereby the insurer reimburses defense
expenditures only after the insured selects counsel, controls the defense, and
submits the defense bill.” Exec. Risk. Indem., Inc. v. Jones, 89 Cal. Rptr. 3d 747,
751 n.4 (Ct. App. 2009) (emphasis added). The language of the policy’s
reimbursement provision confirms this: it required Allied World, at Millennium’s
request, to “reimburse” defense costs. If, as Millennium contends, the policy were
a liability-type policy, then this provision would be surplusage, as the policy’s
coverage provisions would already have obligated Allied World to pay
Millennium’s defense costs as soon as they were incurred. See Okada v. MGIC
2 Indem. Corp., 823 F.2d 276, 280 (9th Cir. 1986); see also Cal. Civ. Code § 1641;
ACL Techs., Inc. v. Northbrook Prop. & Cas. Ins. Co., 22 Cal. Rptr. 2d 206, 213
(Ct. App. 1993).
3. Allied World’s duty to reimburse, moreover, applied only to claims actually
covered by the policy and did not extend to claims merely potentially covered.
“Unlike a comprehensive general liability policy, D & O policies are not written on
a ‘duty to defend’ basis.” Jones, 89 Cal. Rptr. 3d at 751 n.4. “Instead, defense
costs are defined as part of ‘Damages’ for which indemnification is to be paid.”
Health Net, Inc. v. RLI Ins. Co., 141 Cal. Rptr. 3d 649, 670-71 (Ct. App. 2012).
Such was the case here: the policy expressly disclaimed any duty to defend and
instead provided for coverage of defense costs only as an ingredient of covered
losses. And “in the absence of a contractual duty to defend, when defense costs are
recoverable only as covered losses, only those defense costs which were actually
related to the defense of covered claims may be reimbursed.” Id. at 671 (second
emphasis added).
4. The Department of Justice (“DOJ”) investigation did not constitute a single
“claim” for policy purposes. The policy’s definitions of “claim” are “concerned
with the temporal certainty of the ‘Claim,’” rather than with “its scope.” Id. at
672-73. Thus, the investigation is properly viewed as multiple claims, one for each
alleged “wrongful act,” “error, or omission” by an insured that the DOJ
3 investigated.
5. Millennium identifies seven alleged wrongful acts, errors, or omissions that
the DOJ investigated but that purportedly were not subject to the specific-claim or
pending-or-prior-litigation exclusions. Contrary to Millennium’s argument, the
record shows that five claims were excluded from coverage. As to the remaining
two, Millennium has failed to raise a triable issue as to whether they were covered
by the policy at all.
First, Millennium’s allegedly improper use of standing orders, sometimes
called “custom profiles,” to increase drug-testing orders was expressly alleged in
the Schur action and was therefore “related” to that litigation. Thus, any of
Millennium’s defense costs arising from the investigation of its allegedly improper
use of “custom profiles” were subject to the pending-or-prior-litigation exclusion.
Second, the DOJ’s investigation of Millennium’s “Section A issues”
“related” to the Schur action as well. The complaint in Schur alleged that
Millennium “did not require healthcare providers . . . to execute or properly fill out
the confirmation testing requisition indicating which positives and which negatives
if any, needed to be confirmed.” Thus, any defense costs arising from the
investigation of these alleged “Section A issues” were subject to the pending-or-
prior-litigation exclusion.
Third, although the record contains evidence indicating that Millennium did
4 not first speak to the DOJ about its allegedly improper “specimen validity testing”
until after the policy expired, Millennium has put forward no evidence that the
DOJ investigated this alleged wrongful act during the policy period. Thus,
Millennium has failed to show a triable issue over whether any defense costs
associated with the investigation of this alleged act were covered by the policy.
See Royal Globe Ins. Co. v. Whitaker, 226 Cal. Rptr. 435, 437 (Ct. App. 1986); see
also Jackson v. Bank of Haw., 902 F.2d 1385, 1389 (9th Cir. 1990).
Fourth, the DOJ’s investigation of alleged witness intimidation also related
to prior or pending litigation, namely the Ameritox action, which alleged
substantially the same intimidating conduct by Millennium employees as the
DOJ’s complaint in intervention. See Defendant Allied World Assurance Co.
(U.S.) Inc.’s Request for Judicial Notice in Support of Its Motion for Summary
Judgment at 190-91, Millennium Labs, Inc. v. Allied World Assurance Co., No.
3:12-CV-02280-BAS-KSC (S.D. Cal. May 23, 2014), ECF No. 161-4. Thus, the
DOJ’s investigation into this conduct “derived from the same or essentially the
same facts, or the same or related Wrongful Acts, as alleged” in the Ameritox
action. Any defense costs arising therefrom were therefore subject to the prior-or-
pending-litigation exclusion.
Fifth, the DOJ’s complaint in intervention contends that Millennium’s
alleged practice of terminating relationships with or otherwise penalizing client-
5 providers who did not order sufficient urine tests—the “troubled accounts” issue—
was part and parcel of Millennium’s broader alleged practice of causing the
unlawful ordering of unreasonable and unnecessary urine testing in violation of
Medicare and other regulations. Because the Cunningham action alleged this
broader practice, of which the alleged troubled-accounts practice was but a part,
the DOJ’s investigation of the alleged troubled-accounts practice necessarily
“derived from the same or essentially the same facts, or the same or related
Wrongful Acts, as alleged” in the Cunningham action. Defense costs associated
with that part of the investigation were therefore excluded under the pending-or-
Sixth, the only record evidence regarding the DOJ’s investigation into
Millennium’s alleged destruction of evidence indicates that that portion of the
investigation did not begin until after the policy’s coverage period expired.
Because Millennium has put forward no evidence that the DOJ investigated this
alleged wrongful act during the policy period, it has failed to show a triable issue
over whether any defense costs associated with the investigation of this alleged act
were covered by the policy. See Royal Globe Ins. Co., 226 Cal. Rptr. at 437; see
also Jackson, 902 F.2d at 1389.
Seventh, as with the troubled-accounts issue, the DOJ’s complaint in
intervention contends that Millennium’s alleged practice of frequently testing
6 patients with no history of drug abuse was part and parcel of Millennium’s broader
alleged practice of causing the unlawful ordering of unreasonable and unnecessary
urine testing in violation of Medicare and other regulations. Because the
Cunningham action alleged this broader practice, of which the frequency-of-testing
issue was but a component, the DOJ’s investigation of the alleged frequency-of-
testing issue necessarily “derived from the same or essentially the same facts, or
the same or related Wrongful Acts, as alleged” in the Cunningham action.
Defense costs associated with that part of the investigation were therefore excluded
under the pending-or-prior-litigation exclusion.
AFFIRMED.