U-haul International, Inc. v. Clarendon America Insurance Co

FILED
NOT FOR PUBLICATION JUN 04 2010

MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S . CO U RT OF AP PE A LS

FOR THE NINTH CIRCUIT

U-HAUL INTERNATIONAL, INC., No. 09-16244

Plaintiff - Appellant, D.C. No. 2:07-cv-01578-SRB

v.
MEMORANDUM *
CLARENDON AMERICA INSURANCE
CO.,

Defendant - Appellee,

and

AMERICAN INTERNATIONAL
SPECIALTY LINES INSURANCE
COMPANY,

Defendant.

Appeal from the United States District Court
for the District of Arizona
Susan R. Bolton, United States District Judge, Presiding

Argued and Submitted May 13, 2010
San Francisco, California

Before: SILVERMAN, FISHER and M. SMITH, Circuit Judges.

*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
 U-Haul International, Inc., appeals the district court's summary judgment in

favor of Clarendon American Insurance Company in this contract dispute under

Arizona law. We reverse and grant summary judgment to U-Haul. Specifically,

we hold that the insurance agreement obligates Clarendon to pay U-Haul's Claims

Expense once U-Haul has satisfied its Retained Amount through the payment of

damages.

Section I(A)(1) of the insurance agreement provides that Clarendon will be

responsible for paying 'that portion of the Ultimate Net Loss, in excess of the

Retained Amount, which the Insured has become legally obligated to pay as

damages and related Claims Expense.' The definition of Ultimate Net Loss in

Section V(T) confirms that it encompasses damages only, and thus that Claims

Expense is a separate and additional obligation.

Clarendon does not dispute that it is obligated to pay some Claims Expense,

but instead interprets that term to be limited to Clarendon's own litigation costs or

those it otherwise voluntarily incurs. Nothing in the definition of Claims Expense

found in Section V(E) suggests any such limitation. Moreover, at least two aspects

of the definition are plainly inconsistent with Clarendon's interpretation. First, the

inclusion of '[i]nterest as required by law on awards or judgments' is inconsistent

with a limitation to voluntarily incurred expenses. Second, the definition

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specifically excludes '[s]alaries and travel expenses of employees of the Insured'

(emphasis added), which would be unnecessary if the policy already excluded all

of U-Haul's defense costs. Further, Section VII(L)(1)'s condition that Clarendon

consent in writing to any 'Claims Expense paid' is inconsistent with Clarendon's

effort to limit Claims Expense to Clarendon's own expenses. In sum, the only

plausible interpretation of Section I(A)(1) requires Clarendon to pay U-Haul's

Claims Expense once U-Haul has satisfied its Retained Amount through the

payment of damages.

Clarendon raised at oral argument another interpretation of the voluntariness

limitation to mean that if U-Haul tenders its Retained Amount to Clarendon at the

front end of a lawsuit, Clarendon then taµes over the defense of the suit and must

decide whether to incur further expenses toward that end. Nothing in the policy

provides for or even appears to contemplate such a front-end tendering. In any

event, it still does not explain the inconsistencies discussed above.

We also are unpersuaded by Clarendon's argument that other provisions in

the insurance agreement conflict with Section I(A)(1) so as to create an ambiguity

as to Clarendon's obligations. Section I(B)(1) provides that '[t]he defense of

claims or Suits to which this policy applies is the obligation of the Insured.' This

language (along with Section I(B)(2)) places the burden of defense on U-Haul and

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clarifies only that Clarendon would not itself be required to taµe over U-Haul's

defense (also undercutting Clarendon's tendering argument); it does not address

Clarendon's ultimate payment obligations once the Retained Amount is satisfied

through damages. Section I(B)(2) provides: 'The Insured shall pay all claim

expense within the Retained Amount which relates to the defense of claims or

Suits.' Clarendon argues that this means that U-Haul must pay all of its own

defense costs, but such an interpretation renders the phrase 'within the Retained

Amount' meaningless. See Liberty Ins. Underwriters, Inc. v. Weitz Co., 158 P.3d

209, 212 (Ariz. Ct. App. 2007) ('Insurance policy provisions must be read as a

whole, giving meaning to all terms.'). Rather, the sentence reinforces our

conclusion that U-Haul is responsible for its defense costs 'within the Retained

Amount' until it has reached the Retained Amount through the payment of

damages. The second sentence in Section I(B)(2) - 'However, any claim expense

that is incurred by the Insured shall not be applied against the Retained Amount' -

addresses the separate point that U-Haul's defense costs do not erode the Retained

Amount.

Thus, Clarendon has failed either to show that the definition of Claims

Expense should be limited to its own defense costs or to identify any conflicting

provisions in the insurance agreement that would cast doubt on our interpretation.

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We agree with the dissent that if the extrinsic evidence showed that Clarendon's

policy interpretation was plausible, remand would be appropriate to allow a jury to

resolve the disputed issue. See Taylor v. State Farm Mut. Auto. Ins. Co., 854 P.2d

1134, 1140 (Ariz. 1993). Even under Taylor, however, the court may maµe a

threshold determination regarding the evidence's persuasive value. See id. at 1141.

Having considered Clarendon's extrinsic evidence, we conclude that none of it

reasonably supports Clarendon's position on the disputed issue of who bears the

responsibility for U-Haul's Claims Expense after it has satisfied its Retained

Amount. The extrinsic evidence is persuasive only with regard to the now

undisputed issue of whether U-Haul's payment of Claims Expense erodes its

Retained Amount.

Finally, we are not troubled by the purported anomaly that 'Clarendon pays

nothing in the event of a defense verdict, or a verdict against U-Haul in the amount

of ü4,999,999.99 or less, regardless of the amount of litigation costs.' Dissent at 2.

The policy is consistent with limiting U-Haul's damages exposure to ü5 million

and leaving to U-Haul the responsibility for managing any litigation (and defense

costs) when damages are less than that amount. Once that damages threshold is

reached, however, Clarendon's liabilities under Section I(A)(1) are triggered,

including payment of 'damages and related Claims Expense.'

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 Taµing into account the language of the insurance agreement and the

extrinsic evidence in the record, we hold that the policy is not reasonably

susceptible to Clarendon's proffered interpretation. We reverse and remand with

instructions for the district court to grant summary judgment in favor of U-Haul.

See Taylor, 854 P.2d at 1144-45.

REVERSED AND REMANDED.

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 FILED
U-Haul Int'l Co. v. Clarendon Am. Ins. Co., No. 09-16244 JUN 04 2010

MOLLY C. DWYER, CLERK
M. SMITH, concurring in part and dissenting in part: U.S . CO U RT OF AP PE A LS

While I agree with my colleagues that the district court's grant of summary

judgment in favor of Clarendon must be reversed, I respectfully disagree that,

drawing all reasonable inferences in favor of Clarendon, U-Haul is entitled to

judgment as a matter of law. Because I believe Clarendon's interpretation of this

poorly-drafted and ambiguous policy is about as reasonable as U-Haul's, I would

remand to the district court for further proceedings. See State v. Mabery Ranch,

Co., 165 P.3d 211, 217 (Ariz. Ct. App. 2007).

U-Haul's interpretation, for the reasons explained by the majority, may

ultimately be the best reading of the policy's terms. However, Arizona law permits

a court to examine extrinsic evidence in order to determine if a policy is

susceptible of multiple reasonable interpretations without an initial finding of

ambiguity. Taylor v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1134, 1140-41

(Ariz. 1993). Although I might agree that the policy viewed without the aid of

extrinsic evidence is unambiguous, in light of Arizona law, I looµ at the extrinsic

evidence and conclude that when considering that evidence in the light most

favorable to the nonmoving party, Clarendon's interpretation becomes a plausible

reading of the policy language. Moreover, Clarendon's interpretation is reasonable

because it is more in µeeping with traditional underwriting practices. For example,
under U-Haul's interpretation of the policy, Clarendon pays nothing in the event of

a defense verdict, or a verdict against U-Haul in the amount of ü4,999,999.99 or

less, regardless of the amount of litigation costs--even if such costs amount to

millions of dollars. But if U-Haul settles for or suffers a verdict of over ü5 million,

Clarendon pays up to ü5 million in damages and all of the defense costs no matter

how little or large the amount. On the other hand, Clarendon's interpretation of

Section 1(B)(1-2) means U-Haul is obliged to either defend the suit, or instead

tender the limits of its underlying insurance and turn the defense over to

Clarendon.

Further, contrary to what the majority says, Clarendon did offer evidence (in

the form of expert and deposition testimony) that the defined term 'Claims

Expense' in Section 1(A)(1) relates to the cost of its own defense of suits and that

therefore the policy does not cover U-Haul's defense expenses. Clarendon may

ultimately deserve to lose on this argument, either because 'Claims Expense' does

relate to U-Haul's defense costs, or because generally insurance policies should be

construed against the insurer and in favor of coverage. But I would not decide that

Clarendon loses as a matter of law on this record. First, there is both direct and

circumstantial evidence that the parties understood that Clarendon was not offering

to provide any coverage for U-Haul's defense costs. Second, there is no evidence

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suggesting that U-Haul's current interpretation of the policy was accepted by

anyone until midway through the litigation (notably, U-Haul initially argued for a

different interpretation altogether, and U-Haul's counsel adopted yet a third

interpretation of the policy at oral argument). Third, it is a disputed factual issue

whether U-Haul was a sophisticated party in this transaction who affirmatively

participated in negotiating the µey terms of coverage, thus distinguishing this case

from the authorities U-Haul cites. Under the circumstances, I thinµ the proper

result would be to vacate the district court's order, and remand the case for further

proceedings--and perhaps a well-justified settlement.

When interpreting a contract for insurance, our primary responsibility is to

effectuate the intent of the parties. Taylor, 854 P.2d at 1138. The majority's

reading of the policy, rejecting Clarendon's extrinsic evidence, has liµely resulted

in an enforcement of this policy in a way neither party intended at the time of

contracting. I therefore respectfully dissent.

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