American International Insurance v. American National Fire Insurance

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 93-2352
IN RE SAN JUAN DUPONT PLAZA HOTEL FIRE LITIGATION.

AMERICAN INTERNATIONAL INSURANCE COMPANY OF PUERTO RICO
and INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA,

Cross-Claimants, Appellants,
v.

AMERICAN NATIONAL FIRE INSURANCE COMPANY,
Cross-Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO
[Hon. Raymond L. Acosta, U.S. District Judge]

Before

Boudin, Circuit Judge,

Bownes, Senior Circuit Judge,

and Stahl, Circuit Judge.

Robert S. Frank, Jr. with whom Mark D. Cahill, Bret A. Fausett,

Jeffrey A. Levinson, Choate, Hall & Stewart, William R. Kardaras,

Louise A. Kelleher and Cooper, Brown, Kardaras & Scharf were on

briefs for American International Insurance Company of Puerto
Rico and Insurance Company of the State of Pennsylvania.
Kent R. Keller with whom William A. Kurlander, John C. Holmes,

J. Steven Bingman and Barger & Wolen were on brief for American

National Fire Insurance Company.

January 27, 1995

BOUDIN, Circuit Judge. This appeal is a companion to

Lyon v. Pacific Employees Insurance Co., Nos. 93-2115, 93-

2116, which is decided today in a separate opinion. Here,

appellants American International Insurance Company of Puerto

Rico ("AIIC") and Insurance Company of the State of

Pennsylvania ("ISOP") challenge the district court's sua

sponte grant of summary judgment for American National Fire

Insurance Company ("ANFIC") on AIIC/ISOP's cross-claim for

defense costs. The appellants contend that the district

court's action in granting summary judgment sua sponte was

procedurally flawed because they had no notice and no

opportunity to present a defense. AIIC and ISOP were the

primary general liability insurers for the Dupont Plaza and

related entities when the hotel fire occurred on December 31,

1986. Their insureds included the San Juan Dupont Plaza

Corporation, Holders Capital Corporation ("Holders"), Hotel

Systems International ("HSI"), Hotel Equipment Leasing

Associates ("HELA") and William Lyon, in his capacity as a

shareholder and director of the various Dupont Plaza

entities.1 As the primary insurers for the hotel, AIIC and

1Holders, in which Lyon and others had an ownership
interest, was the holding company for various hotel
operations. HSI, a subsidiary of Holders, owned and operated
the Dupont Plaza. HELA is a limited partnership, in which
Lyon was a limited partner, that leased hotel equipment to
various hotels including the Dupont Plaza.

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ISOP financed the hotel's defense of the massive fire

litigation, expending over $40,000,000 in defense costs.

At the time of the fire, ANFIC was the primary general

liability insurer for the William Lyon Company, a California

residential construction and development company, and related

entities, including William Lyon individually. As Lyon

explains in detail, Pacific Employers Insurance Company

("PEIC") and First State Insurance Company ("FSIC") were

among several excess insurers for the William Lyon Company

and its related insureds at the time of the fire, and their

coverage provided additional layers of protection over and

above ANFIC's primary coverage.

In general, as is typical in excess insurance cases,

PEIC and FSIC provided coverage similar to ANFIC's primary

coverage. Like the PEIC and FSIC policies, the ANFIC

policy's only direct link to the Dupont Plaza was Lyon's

status as a named individual insured; no Dupont Plaza entity

was listed as an insured, and no listed insured other than

Lyon was involved in the hotel business. In addition, like

the PEIC and FSIC policies, the ANFIC policy limited Lyon's

individual coverage to the conduct of businesses of which he

was the "sole proprietor."

Soon after the fire-injury suits began, Lyon and Holders

tendered their defenses to ANFIC. ANFIC agreed to defend

Lyon, but reserved its rights to deny coverage on the ground

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that Lyon had not been sued in an insured capacity. ANFIC

declined to defend Holders on the basis that it was not an

insured. In April 1988, ANFIC filed a declaratory judgment

action in a California federal court against Lyon and others

to resolve the coverage issues. This action was subsequently

consolidated with the multi-district litigation in Puerto

Rico and eventually dismissed without prejudice.

AIIC, ISOP and ANFIC were all eventually joined as

defendants in the first phase of the fire-injury litigation--

AIIC and ISOP in September 1987 and ANFIC in January 1989.

In February 1989, AIIC and ISOP filed a cross-claim against

ANFIC, seeking contribution for their costs for defending

Lyon and the other Dupont Plaza entities related to him. In

May 1989, when phase I was resolved by settlement, AIIC, ISOP

and ANFIC all contributed their coverage limits as damages to

the victims' settlement fund--a combined $1 million for AIIC

and ISOP and $1 million for ANFIC--with ANFIC expressly

reserving its rights later to dispute its obligation to

contribute to defense costs.

In phase III of the litigation, the district court

undertook the unenviable task of sorting out the contractual

liabilities of the various insurers. On December 7, 1992, in

Order No. 469, the district court ruled that the PEIC and

FSIC policies did not cover the fire-related obligations of

Lyon or any of the Dupont Plaza entities connected to him, a

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result that we have today affirmed in Lyon. Since its policy

largely paralleled the PEIC and FSIC policies, ANFIC was

encouraged by Order No. 469 to move for summary judgment on

AIIC/ISOP's cross-claim for defense costs.

Because the district court's deadline for the filing of

pre-trial motions had long since passed, ANFIC was first

required to obtain the court's permission to file the motion

out of time. On February 25, 1993, ANFIC filed a twelve-page

motion seeking leave to file for summary judgment,

predicating its request on the identity of the issues decided

in Order No. 469. The motion outlined the substance of

ANFIC's proposed summary judgment arguments and presented

procedural arguments why the court should allow the belated

summary judgment filing. ANFIC also requested that the court

establish an appropriate briefing schedule for summary

judgment filings.

On March 9, 1993, AIIC and ISOP filed a seven-page

opposition to ANFIC's motion for leave, setting forth both

procedural and substantive grounds for denial. The

opposition briefly urged differences between a primary

insurer's defense obligation and an excess insurer's coverage

obligation, hoping to distinguish AIIC/ISOP's contribution

claim against ANFIC from the liability coverage claims

asserted by Holders and Lyon against PEIC and FSIC. The

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opposition did not contain any analysis or discussion of

California law on the duty to defend.

In the event the court granted ANFIC's motion for leave

to file, AIIC and ISOP requested similar permission to file a

cross-motion for summary judgment to affirm ANFIC's duty to

contribute to Lyon's defense. AIIC and ISOP also filed a

motion seeking production of ANFIC's underwriting files,

claiming that those files contained admissions relating to

ANFIC's obligation to defend Lyon. Although the motion did

not identify the supposed admissions, on appeal AIIC and ISOP

suggest only that the files might help establish that ANFIC

was responsible for including an allegedly ambiguous omnibus

clause in its policy.

On September 2, 1993, the district court entered Order

No. 495, granting summary judgment for ANFIC on AIIC/ISOP's

cross-claim for defense costs. Treating ANFIC's motion for

leave to file as a request for summary judgment, the district

court ruled that ANFIC's primary policy, like the parallel

PEIC and FSIC policies, did not cover Lyon or any of the

Dupont Plaza entities. Because AIIC/ISOP's cross-claim was

"distinct and separate from any remaining claims" in the fire

litigation, the court entered Final Judgment No. 12

dismissing the cross-claim in its entirety. The court also

dismissed AIIC/ISOP's request for production of documents as

moot. On October 8, 1993, in Order No. 506, the court denied

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AIIC/ISOP's timely motion to reconsider, and this appeal

followed.

As a preliminary matter, ANFIC argues that this appeal

is limited to a review of Order No. 506, which is the

district court's denial of the motion for reconsideration,

and that our inquiry is therefore for abuse of discretion

only. See, e.g., Mariani-Giron v. Acevedo-Ruiz, 945 F.2d 1,

3 (1st Cir. 1991). ANFIC points to the fact that appellants'

notice of appeal is entitled, "Notice of Appeal to the First

Circuit Court of Appeals From Order No. 506 of District Court

Judge Raymond L. Acosta Dated October 8, 1993." AIIC and

ISOP contend Order No. 495, the district court's summary

judgment ruling, is also before this court.

An appeal from the denial of a motion for

reconsideration is not an appeal from the underlying

judgment. LeBlanc v. Great American Ins. Co., 6 F.3d 836,

839 (1st Cir. 1993), cert. denied, 114 S. Ct. 1398 (1994)

(collecting cases). But we have allowed "a timely appeal

from the denial of a timely Rule 59(e) motion to serve as

notice of an appeal from the underlying judgment in cases

where the appellant's intent to appeal from the judgment is

clear." Id. A mistake in designating a judgment in the

notice of appeal will not ordinarily result in a loss of the

appeal "as long as the intent to appeal from a specific

judgment can be fairly inferred from the notice, and appellee

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is not misled by the mistake." Kelly v. United States, 789

F.2d 94, 96 n.3 (1st Cir. 1990).

AIIC/ISOP's notice of appeal manifests AIIC/ISOP's

intent to appeal the summary judgment ruling. The body of

the notice referred to Order No. 469 and Final Judgment No.

12. The notice, filed on November 1, 1993, following the

district court's denial of the motion to reconsider on

October 8, 1993, was timely for an appeal of Order No. 469

and Final Judgment No. 12. See Fed. R. App. 4(a). The title

of the notice, which refers only to the motion to reconsider,

is not dispositive, and there is no claim that ANFIC was

prejudiced in any way by the mislabeled notice. See Kotler

v. American Tobacco Co., 981 F.2d 7, 11-12 (1st Cir. 1992).

We turn now to the district court's decision to grant

summary judgment in favor of ANFIC. When the district court

granted summary judgment, there was no formal motion for

summary judgment pending before it; it had only the ANFIC's

motion requesting leave to file and the AIIC/ISOP's

opposition. These filings did outline the substance of the

parties' respective positions on the merits. Still, in

formal terms, the district court's ruling was "the functional

equivalent of a sua sponte grant of summary judgment."

Stella v. Town of Tewksbury, 4 F.3d 53, 55 (1st Cir. 1993).

In Stella, we recognized that a district court can grant

summary judgment on its own initiative so long as the

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parties' procedural interests are protected. 4 F.3d at 55.

In particular, discovery must be far enough examined to let

the court accurately decide whether there are genuine issues

of material fact and to make the parties aware of the

evidence that they can adduce. Id. Further, the litigants

need notice from the district court of its intention to

consider a grant of summary judgment, so that the litigants

can present their arguments and their evidence. Id.

In this case, there was on the one hand no notice that

the district court was considering a grant of summary

judgment, for the only issue pending was whether the court

would grant permission to file such a motion. On the other

hand, the parties in the course of presenting their positions

on the latter issue also revealed much of what they had to

say on the substance of the merits of summary judgment. The

matter is further complicated because AIIC/ISOP also took the

position that, before responding to a summary judgment

motion, they needed additional discovery in order to

illuminate the question who drafted the omnibus clause in the

ANFIC policy.

If we were completely certain that the merits of the

summary judgment issue had been fully presented to the

district court, it might be reasonable to conclude either

that the essence of the Stella notice requirement had been

satisfied or that the failure to satisfy it was harmless.

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See Stella, 4 F.3d at 56 n.4. Further, our own opinion today

in the companion case significantly limits the arguments left

open to AIIC/ISOP and also appears to render its discovery

request irrelevant. But there does remain unresolved a

significant legal issue, not squarely addressed by the

district court, so we are persuaded that a remand is the most

appropriate solution.

Broadly speaking, as to coverage for liability, ANFIC's

position appears to be materially identical to that of PEIC

and FSIC decided in the companion Lyon case. The reasons we

have given in that case for exculpating PEIC and FSIC make

clear that claims of liability coverage by Lyon or Holders

against ANFIC would also fail. The sole proprietor

endorsement appears in the ANFIC policy, and we have held in

Lyon that this endorsement limits claims under the omnibus

clause without regard to who drafted the provisions. Yet,

there is a further argument, vigorously pressed by AIIC/ISOP,

that the duty to defend under California law is broader than

the duty to indemnify and applies wherever a liability

coverage claim has "potential" validity even though it

ultimately fails.

There is apparently no dispute that under California law

the duty to defend is broader than the duty to indemnify.

Horace Mann Ins. Co. v. Barbara B., 846 P.2d 792, 795 (Cal.

1993). AIIC/ISOP say that wherever there is potential

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coverage under a policy--by potential they appear to mean

"arguable"--the duty to defend exists. All parties also seem

to assume that, if there was a duty on the part of ANFIC to

defend at the outset, then it is liable for contribution to

the defense costs even if the potential claim of liability

coverage is later resolved in the negative. Montrose Chem.

Corp. of Cal. v. Superior Court, 861 P.2d 1153, 1157 (Cal.

1973); Continental Casualty Co. v. Zurich Ins. Co., 366 P.2d

455, 461 (Cal. 1961).

ANFIC, however, says that the duty to defend in arguable

cases does not extend to those in which the dispute is about

whether the putative insured is actually insured under the

policy; and ANFIC cites California cases that it thinks

support its position. Wint v. Fidelity & Cas. Co., 507 P.2d

1383, 1388 (Cal. 1973); McLaughlin v. National Union Fire

Ins. Co. of Pittsburgh, Pa., 29 Cal. Rptr. 2d 559, 570 (Cal.

Ct. App. 1994). ANFIC also seems to think that it matters

that (in its view) the burden of proof to establish that an

individual or company is protected by a policy is upon the

claimant, whereas proving that a restriction or exclusion

applies is upon the insurer.

We are doubtful whether this supposed difference in

burden of proof matters in a case in which the facts are not

in dispute, but the extent of the duty to defend under

California law may be a debatable point. While law on the

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duty to defend in potential coverage cases might be limited

in the fashion that ANFIC suggests, it is also possible that

the duty to defend exists in any case in which there is

arguably coverage, regardless of what policy language is in

dispute. In the alternative, perhaps the duty to defend

exists at least where the defendant in the underlying

liability litigation is a named insured, and the dispute as

to coverage turns on whether the insured is sued in a covered

"capacity."

Assuming there is a duty to defend in arguable cases and

that ANFIC's distinction between types of disputes does not

wash, the question would remain whether coverage here was

arguable. While our reading of the policy language in Lyon

may somewhat impair AIIC/ISOP's position, nevertheless under

California law the duty to defend is evaluated in terms of

likelihoods at the outset of litigation. See, e.g., Horace

Mann, 846 P.2d at 795. A court's later conclusion that a

provision should be read one way, and that extrinsic evidence

is beside the point, does not necessarily mean that the

contrary view was inarguable. The standard of what is

arguable is itself a matter of California law.

Although the issues as we have posed them are

essentially legal ones, there are numerous reasons why a

remand is appropriate so the district court can consider the

matter in the first instance. Discovery aside, it is not

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completely clear that the parties have said everything they

can about the "merits," since much of the briefing in this

court has been directed to the procedural propriety of

summary judgment and not to the merits. Since the reach of

California law on the duty to defend is disputed, our concern

that the parties may not have mustered all of their merits

arguments and citations is not a formality.

Further, we are not wholly certain that our narrowing of

the issues is justified. Although our companion opinion in

Lyon probably eliminates any basis for concern about who

drafted the omnibus clause in the ANFIC policy, none of the

litigants has had an opportunity to address this issue in

light of Lyon. Similarly, we are skeptical that ANFIC's

willingness to assume Lyon's defense in the underlying

litigation is much of an admission vis-a-vis the AIIC/ISOP

claim; as ANFIC points out, it could be subject to harsh

penalties under California law if it breached the duty to

defend. Still, the presence of this kind of dangling dispute

shows why the wiser course is to remand.

Finally, although we are reluctant to prolong what has

been extraordinarily burdensome litigation, no judge on this

panel compares to the presiding district judge in his

familiarity with the facts, the procedural history, and the

possible ramifications of California law in relation to the

dispute. The district court did not in its grant of summary

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judgment discuss the asserted distinctions between the duty

to indemnify and a duty to defend or their connection to the

claims of contribution pressed by AIIC/ISOP in this case.

This is one more reason why a remand is the wiser outcome.

On remand, we think that the proper course would be for

the district court to invite ANFIC to file a formal motion

for summary judgment and to allow AIIC/ISOP to file papers in

opposition, or a cross-motion in their own favor, or both.

If any party wishes to claim that additional discovery is

necessary, it is free to do so. As already noted, we have

not discerned any obvious factual issues requiring further

discovery but the district court is free to determine

otherwise after the parties have had an opportunity to

present their positions.

The judgment is vacated and the case remanded for

further proceedings in accordance with this opinion.

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