852 F. 2d 1290 - St Paul Fire Marine Insurance Company v. Savodnik Md

MEMORANDUM*

Irwin Savodnik appeals from a summary judgment entered by the United States District Court for the Central District of California in favor of St. Paul Fire & Marine Insurance Company. The district court ruled that an insurance policy issued by St. Paul to Savodnik did not afford Savodnik coverage for claims by Torrance Memorial Hospital Medical Center that Savodnik was guilty of unfair competition, misappropriation of service mark and trade secrets, and other business torts for allegedly stealing Torrance Memorial's diet program entitled "Finally Fat Free." The district court held that St. Paul had no duty to indemnify Savodnik for any claims raised in the Torrance Memorial lawsuit; no duty to defend Savodnik against Torrance Memorial or to prosecute any cross-actions on his behalf; and no duty to reimburse Savodnik for any costs he incurred in the Torrance Memorial action. Furthermore, the court ruled that St. Paul did not breach any duty to defend Savodnik after it accepted his defense in the Torrance Memorial lawsuit under a reservation of rights. Savodnik challenges all of these rulings on appeal. We review grants of summary judgment de novo. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir.1986).

The insurance policy at issue was a general liability policy. Insuring Agreement 51, which afforded "Office Liability Protection," is the only part of Savodnik's policy that is relevant to this case. This provision covered accidental events resulting in bodily injury, personal injury, or property damage unless otherwise excluded.

The question is whether the business torts alleged by Torrance Memorial qualify as "accidental events" resulting in the type of harm that the St. Paul policy encompasses. We hold that it does not cover such business torts. Liability for misappropriation of a program is clearly not "bodily injury" or "personal injury," as Savodnik implicitly concedes. It is also not "property damage," which the policy defines as "[a]ny damage to tangible property, including loss of use of tangible property." See Lassen Canyon Nursery v. Royal Ins. Co., 720 F.2d 1016, 1018 (9th Cir.1983); Giddings v. Industrial Indem. Co., 112 Cal.App.3d 213, 219, 169 Cal.Rptr. 278, 281 (1980). Not even medical records, which were the basis of a conversion claim brought by Torrance, fell within this definition. Even if the records or any of the other property on which the Torrance suit was based did qualify as "property" under the policy, the summary judgment was still proper because the intentional torts claimed by Torrance Memorial were not "accidental events" within the meaning of the policy. See Royal Globe Ins. Co. v. Whitaker, 181 Cal.App.3d 532, 537 & n. 5, 226 Cal.Rptr. 435, 437-38 & n. 5 (1986); St. Paul Fire & Marine Ins. v. Superior Court of Yuba County, 161 Cal.App.3d 1199, 1202, 208 Cal.Rptr. 5, 7 (1984); Giddings, 122 Cal.App.3d at 220, 169 Cal.Rptr. at 281-82.

Nor was St. Paul liable for Savodnik's defense costs. St. Paul did offer to defend Savodnik under a reservation of rights, but, as Savodnik concedes, this offer was rejected.1 Because no agreement was ever reached concerning St. Paul's duty to pay defense costs, no duty arose. Savodnik's argument that St. Paul somehow became liable for defense costs when it agreed to defend Savodnik under a reservation of rights therefore lacks merit, as do his "bad faith" claims against the insurance company.

AFFIRMED.

I respectfully dissent. I would hold that undertaking a defense with a reservation of rights entails a duty to pay attorneys' fees. Because I do not believe that St. Paul had a right to reimbursement, I would reverse in part and remand for a determination of the amount of fees St. Paul owes Dr. Savodnik.

The majority concludes that when there is no coverage and thus no duty to defend, there is likewise no duty to pay or reimburse the insured for the costs of defense. But the absence of a duty to defend is irrelevant to a consideration of the independent duty to pay defense costs once St. Paul agreed to defend. Obviously the undertaking of a defense would be utterly meaningless if no funds were provided to finance the litigation. Under California law it is clear that once a defense is undertaken there is an obligation to pay costs and attorney fees. In Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858, 882, 110 Cal.Rptr. 511, 527 (1973), the court noted that under the policy in that case Reserve had two duties with respect to defending its insured: first, "to employ competent counsel ... and to provide counsel with adequate funds to conduct the defense of the suit" and second, "to keep abreast of the progress and status of the litigation in order that it may act intelligently and in good faith on settlement offers."

The same duties may be inferred from the policy provisions in this case and from St. Paul's letter offering to pay the reasonable costs of Dr. Savodnik's chosen counsel or other designated counsel. The majority indicates that Dr. Savodnik rejected the offer to defend. He did not. He merely questioned the legal basis for St. Paul's claim of a right to reimbursement. In the ensuing months St. Paul sent several letters asking Dr. Savodnik to submit a breakdown of his bill for attorney fees. This extended correspondence attempting to clarify the amount due for defense of Dr. Savodnik's claim as opposed to amounts for defense of his co-defendant and for prosecution of Dr. Savodnik's counter-claim, is evidence of the fact that St. Paul recognized and accepted its duty to defend and merely questioned the amount it should pay Dr. Savodnik's attorney.

St. Paul's argument that it made efforts to pay attorneys' fees and "was not permitted to do so" is completely beside the point. There is a duty to pay litigation costs which derives from the agreement to undertake the defense and that duty has not yet been discharged; the case should be remanded for a determination of the amount due.

If St. Paul had paid the attorneys' fees as billed, the issue before this court would have been whether St. Paul is entitled to reimbursement. It is not clear whether the majority thinks there is a right to reimbursement of fees and costs in every case where it is determined that there is no duty to defend under the policy. But the law is clear that such a right is a matter of agreement between the parties. See, e.g., Insurance Co. of the West v. Haralambos Beverage Co., 195 Cal.App.3d 1308, 241 Cal.Rptr. 427, 434-435 (1987) (amounts expended are not reimbursable as a matter of law; rather, there must be an agreement or understanding