Yaffe Companies, Inc. v. Great American Insurance

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
August 27, 2007
UNITED STATES CO URT O F APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT

THE YAFFE COM PANIES, IN C.,

Plaintiff - Appellant,
v. No. 06-7057
GREAT AM ERICAN INSURANCE
COM PANY, IN C.,

Defendant - Appellee.

A PPE AL FR OM T HE UNITED STATES DISTRICT COURT
FO R TH E EASTERN DISTRICT O F O K LAH O M A
(D.C. NO . 05-CV-466-FH S)

Harvey D. Ellis, Jr. (Kevin D . Gordon and Jesse C. W hite, with him on the brief),
Crowe & Dunlevy, Oklahoma City, Oklahoma, for Plaintiff - A ppellant.

Edward J. M ain (James K. Secrest, II, and Roger N. Butler, Jr., with him on the
brief), Secrest, Hill & Butler, Tulsa, Oklahoma, for Defendant - Appellee.

Before BR ISC OE, HA RTZ, and GORSUCH, Circuit Judges.

HA RTZ, Circuit Judge.

This appeal arises out of a claim under a commercial umbrella insurance

policy. The district court entered summary judgment in favor of Great American

Insurance Company, Inc., denying the claim of the Yaffe Companies, Inc. on the
ground that the policy unambiguously precluded coverage. Yaffe Cos., Inc. v.

Great Am. Ins. Co., N o. C V-05-466-FHS, 2006 W L 1388448, at *3, *5 (E.D.

Okla. M ay 12, 2006). W e hold that the policy is ambiguous and reverse and

remand for further proceedings.

I. B ACKGR OU N D

On December 28, 2004, an explosion at Yaffe’s scrapyard in M uskogee,

Oklahoma, caused significant property damage and bodily harm. W hen it filed its

complaint, Yaffe had incurred $1,785,986.89 in liability on claims by numerous

parties. Two insurance policies cover Yaffe’s liability. One is a commercial

general-liability policy issued by ACE American Insurance Company (ACE). The

policy provides coverage up to $1,000,000 per occurrence, with a general

aggregate limit of $2,000,000 and a deductible of $10,000 per claim. The other

policy is a commercial umbrella policy with Great American. As a general

matter, umbrella policies provide two types of insurance coverage: (1) excess

coverage for events also covered by other underlying insurance policies that

provide primary protection and (2) primary coverage for events not covered by

other policies. See Com mercial Union Ins. Co. v. Walbrook Ins. Co., 7 F.3d 1047,

1053 (1st Cir. 1993). The Great American policy has a coverage limit of

$25,000,000. But its excess coverage does not begin until the amount that Yaffe

“becomes legally obligated to pay,” Great American policy § I, exceeds the

policy’s “Retained Limit,” which is “the total amounts stated as the applicable

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limits of the underlying policies [in the policy schedule],” id. § II.G.1. (Citations

to the Great American policy, Aplt. App. Vol. I at 73–132, will refer to sections

of the policy rather than pages of the appendix.)

The source of the difficulty in this case is the type of deductible in the ACE

policy. The deductible is $10,000 per claim. That the deductible is per-claim

rather than per-occurrence is apparently unusual. See 1 Barry R. Ostrager &

Thomas R. Newman, Handbook on Insurance Coverage Disputes § 9.02, at 557

(2006) (in commercial general-liability policies “there is typically one deductible

for each occurrence”). The nature of the deductible makes a substantial

difference in the A CE policy’s coverage of the M uskogee explosion. Because

most claims were under $10,000, the policy covers only $497,999.10 of Y affe’s

total liability of $1,785,986.89. If the $10,000 deductible had been per

occurrence, ACE would have had to pay $1,000,000, and there would be no

dispute that Great American must cover the total liability in excess of $1,000,000

(or perhaps $1,010,000).

Yaffe sought coverage from Great American in the amount of $785,986.89,

the difference between the total amount of the claims against it arising from the

explosion and $1,000,000. (Yaffe also raised a separate claim, but it is not

pursued on appeal.) Great American denied the claim, noting that ACE had paid

only $497,999.10 and asserting that the Great American policy does not provide

coverage until the $1,000,000 limit of the ACE policy has been exhausted.

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 On October 14, 2005, Yaffe filed an action against G reat American in

Oklahoma state court, claiming that Great American had breached its insurance

contract and seeking a declaration of coverage. Great American timely removed

the case to the United States District Court for the Eastern District of Oklahoma

on November 21, 2005, claiming diversity jurisdiction under 28 U.S.C.

§ 1332(a)(1) because Yaffe is an Oklahoma corporation with its principal place of

business in Oklahoma and Great American is an Ohio corporation with its

principal place of business in Ohio. The next day Great American filed a

counterclaim against Y affe, seeking a declaration that it has no obligation to

provide coverage on claims arising from the M uskogee explosion until Yaffe has

exhausted the ACE policy’s $1,000,000 limit.

On M arch 28, 2006, Great American moved for summary judgment. Yaffe

responded and Great American replied. On April 21, shortly after Great

American filed its reply in support of summary judgment, Yaffe moved to compel

discovery, seeking information and documents from Great American regarding its

construction of its umbrella policies w ith similar language. Yaffe then filed its

own motion for summary judgment on M ay 5.

One w eek later, before G reat American had filed a response to Yaffe’s

summary-judgment motion, the district court granted Great American’s summary-

judgment motion while denying Yaffe’s motion. It ruled that the Great American

policy is unambiguous and that Great American is obligated to make payments

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under its policy only “when Yaffe becomes legally obligated to pay sums in

excess of or, stated another way, after exhaustion of, the $1,000,000 coverage

provided by the ACE policy.” Yaffe, 2006 W L 1388448, at *3. The district court

also denied Yaffe’s motion to compel discovery, reasoning that such information,

“while potentially relevant to a tort claim for bad faith,” had no relevance to the

contract claims because it had determined that the contract was to be interpreted

based on its language alone. Aplt. App. Vol. 2 at 519 (Op. & Order, M ay 12,

2006). Judgment was entered the same day.

Yaffe appeals the grant of summary judgment to Great American, the denial

of its own summary-judgment motion, and, in the alternative, the denial of its

motion to compel discovery.

II. D ISC USSIO N

A. Standard of Review

“[A]n order denying summary judgment is review able w hen . . . it is

coupled with a grant of summary judgment to the opposing party.” Padfield v.

AIG Life Ins. Co., 290 F.3d 1121, 1124 (9th Cir. 2002); see McIntosh v.

Scottsdale Ins. Co., 992 F.2d 251, 253 (10th Cir. 1993) (“W here we reverse a

summary judgment order in favor of one party, . . . we will review the denial of

the other party’s cross-motion for summary judgment under the same standards

applied by the district court so long as it is clear that the party opposing the

cross-motion had an opportunity to dispute the material facts.”); James W m.

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M oore et al., M oore’s Federal Practice § 56.41[1], at 56-284.1 (3d ed. 2006); 10A

Charles Alan W right et al., Federal Practice and Procedure § 2715, at 268 (3d ed.

1995). Thus, we review both the grant of summary judgment to Great American

and the denial of summary judgment to Yaffe. “W e review de novo a district

court’s grant or denial of summary judgment, and we apply the same legal

standard to be employed by the district court under Federal Rule of Civil

Procedure 56(c).” M aldonado v. City of Altus, 433 F.3d 1294, 1302 (10th Cir.

2006) (brackets and internal quotation marks omitted), overruled on other

grounds as recognized by Metzler v. Fed. Home Loan Bank of Topeka, 464 F.3d

1164, 1171 n.2 (10th Cir. 2006). Summary judgment is appropriate if “there is no

genuine issue as to any material fact and . . . the moving party is entitled to a

judgment as a matter of law .” Fed. R. Civ. P. 56(c).

B. M otions for Summary Judgment

Yaffe contends that summary judgment for Great American was improper,

and summary judgment for it was proper, because (1) the policy’s unambiguous

terms require Great American to provide coverage once Yaffe’s liability for the

explosion exceeded $1,000,000, and (2) even if the policy is ambiguous, that

ambiguity must be construed against the drafter and in favor of Yaffe’s

reasonable expectations of insurance coverage. Great American counters that

summary judgment was proper because the terms of its policy unambiguously

indicate that it is not obligated to provide coverage until the $1,000,000 per-

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occurrence limit of the ACE policy has been exhausted. It makes no alternative

argument in the event that we hold the policy to be ambiguous.

Oklahoma substantive law applies to this diversity action. See Air Liquide

Am. Corp. v. Cont’l Cas. Co., 217 F.3d 1272, 1275 (10th Cir. 2000). Its approach

to interpreting insurance policies is unremarkable:

The foremost principle is that an insurance policy is a contract.
Parties are at liberty to contract for insurance to cover such risks as
they see fit and they are bound by terms of the contract. It
necessarily follows that courts are not at liberty to rewrite the terms
of an insurance contract. The interpretation of the policy, with its
exclusions, is a law question, unless the facts necessary to apply the
decided law question are in dispute.

W hen addressing a dispute concerning the language of an
insurance policy, our first step is to determine as a matter of law
whether the policy language at issue is ambiguous. If it is not
ambiguous, we accept the language in its plain, ordinary and popular
sense. W e must construe the policy to give a reasonable effect to all
of its provisions, construing liberally words of inclusion in favor of
the insured and construing strictly words of exclusion against the
insurer.

Duensing v. State Farm Fire & Cas. Co., 131 P.3d 127, 134 (Okla. Civ. App.

2005) (citations omitted) (summarizing Oklahoma Supreme Court caselaw).

“Insurance contracts are ambiguous only if they are susceptible to two

constructions.” M ax True Plastering Co. v. U.S. Fid. & Guar. Co., 912 P.2d 861,

869 (Okla. 1996). W hen a contract is ambiguous, extrinsic evidence is necessary

to resolve the ambiguity. See Cam pbell v. Indep. Sch. Dist. No. 01 of Okmulgee

County, 77 P.3d 1034, 1039 (Okla. 2003). In considering ambiguous insurance

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contracts, courts “examine the policy language objectively to determine whether

an insured could reasonably have expected coverage. . . . [A ]mbiguities are

construed most strongly against the insurer.” M ax True, 912 P.2d at 865.

The parties rely on several different provisions of the Great American

policy. W e address them in turn. Section I states:

[G reat American] will pay on behalf of [Yaffe] those sums in excess
of the “Retained Limit” that [Yaffe] becomes legally obligated to pay
by reason of liability imposed by law or assumed by [Yaffe] under an
“insured contract” because of “bodily injury,” “property damage,”
“personal injury,” or “advertising injury” that takes place during the
Policy Period and is caused by an “occurrence” happening anywhere.
The amount we will pay for damages is limited as described below in
the Insuring Agreement Section II. LIM ITS OF INSURA NC E.

Great American policy § I. (Neither party suggests that the insured-contract

language applies in this case.) Subsection II.G defines Retained Limit. It states:

W e will be liable only for that portion of damages, subject to the
Each Occurrence Limit stated in the Declarations, in excess of the
“[R]etained [L]imit,” which is the greater of:

1. the total amounts stated as the applicable limits of the
underlying policies listed in the Schedule of Underlying
Insurance and the applicable limits of any other insurance
providing coverage to [Yaffe] during the Policy Period; or

2. the amount stated in the Declarations as Self-Insured Retention
as a result of any one “occurrence” not covered by the
underlying policies listed in the Schedule of Underlying
Insurance nor by any other insurance providing coverage to
[Yaffe] during the Policy Period;

and then up to an amount not exceeding the Each Occurrence Limit
as stated in the D eclarations.

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 Once the Self-Insured Retention has been exhausted by actual
payment of “claims” in full by [Yaffe], the Self-Insured Retention
will not be reapplied or again payable by [Yaffe] for said Policy
Period.

Id. § II.G. (The parties agree that the latter of the two alternatives in

§ II.G— self-insured retention— is irrelevant to this appeal.) The Schedule of

Underlying Insurance lists a per-occurrence limit of $1,000,000 for the ACE

policy.

Great American contends that these provisions mean that its “obligation to

pay is limited to Yaffe’s liability in excess of the limits of the underlying policy,”

Aplee. Br. at 17, and consequently, “Great American has no obligation to pay

under its umbrella policy until the limits of the ACE Primary Policy have been

exhausted,” id. at 20. W e disagree. The natural meaning of the above provisions,

read together, is that the Great American policy provides coverage for liability of

Yaffe above the Retained Limit of $1,000,000. Because Yaffe has “become[]

legally obligated to pay” $1,785,986.89, Great American would be required to pay

the amount in excess of $1,000,000, or $785,986.89. The policy defines the

Retained Limit as the total of “amounts” that appear in the Schedule of

Underlying Insurance. This schedule sets forth numbers representing policy

limits of the underlying policies. If any other features of the underlying

policies— such as the size of the deductible or w hether the deductible is per-

occurrence or per-claim— were relevant to computation of the Retained Limit,

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certainly those features w ould be described in the schedule. But the schedule sets

forth only that the ACE policy has a general aggregate limit of $2,000,000 and a

per-occurrence limit of $1,000,000. Indeed, the underwriting file that Great

American created in preparing the policy does not include a description of the

nature of the deductible; it states only that the ACE policy had a $10,000

deductible, with no specification of whether it applied per claim or per

occurrence.

In our view the language in § I (Coverage) and § II.G (Retained Limit) of

the Great American policy implies that coverage begins once Yaffe has incurred

liabilities exceeding $1,000,000. Cf. U.S. Fire Ins. Co. v. Charter Fin. Group,

Inc., 851 F.2d 957, 959 & n.6, 963 (7th Cir. 1988) (when excess policy defined

“retained limit” as, in pertinent part, “the total of the applicable limits of the

underlying policies listed” and underlying policy provided coverage of $100,000,

court interprets excess policy as providing coverage for property damage

beginning at $100,000 (internal quotation marks omitted)); Fried v. N. River Ins.

Co., 710 F.2d 1022, 1024, 1026–27 & n.6 (4th Cir. 1983) (when excess policy

defined “retained limit” as “‘the total of the applicable limits of the underlying

policies listed in Schedule A hereof, and the applicable limits of any other

underlying insurance available to the insured,’” court interprets policy as

providing coverage “above the threshold level of the face value of the Schedule A

policies” and notes that “[t]o hold otherwise subjects the insurer to unforeseeable

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and variable risks depending upon the underlying insurance actually maintained

by any one of the potential insureds”). At oral argument Great American

suggested that Yaffe’s construction of these provisions would free Yaffe from the

bargain it made (at least implicitly) with ACE— namely, that in exchange for a

reduced premium on the ACE policy, Yaffe agreed that the deductible w ould

apply per claim rather than per occurrence and thereby risked having a much

larger deductible in some instances. But Yaffe’s bargain with ACE should be

irrelevant to the construction of the language of the Great American policy. And

in any event, Yaffe has clearly paid, through the nose, for the bargain it made.

Even under Yaffe’s construction of the Great American policy, a cheaper

insurance policy with ACE with a per-claim deductible has caused it to have to

pay more than $500,000 in deductibles before Great American starts to pay.

The dissent argues that our reading of §§ I and II.G must be w rong because

it renders irrelevant the actual coverage by the underlying policies. “[I]t would

have been far simpler,” says the dissent, “to establish a set deductible amount,

rather than to establish that amount by reference to the applicable limits of the

underlying insurance policies.” Op. (Briscoe, J., dissenting) at 7. W e are not

persuaded. The policy definition of Retained Limit is the sum of the limits of all

insurance policies providing coverage to Yaffe, not just the policies listed in the

Schedule of Underlying Insurance. See § II.G. If the policy stated simply “a set

deductible amount,” the Retained Limit would not be automatically increased, as

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it is under the present language, if Yaffe acquired additional underlying

insurance.

The dissent also asserts that there would be no need for § VI.I of the policy,

which requires Y affe to maintain its underlying insurance, if Great American’s

coverage depends only on amounts set forth on the Schedule of Underlying

Insurance. We note that G reat American itself has made no such argument. On

the contrary, its brief to this court chastises Yaffe for raising on appeal an

argument based on § VI.I that it had not raised below . It continues: “M oreover,

the argument is irrelevant as Yaffe did maintain underlying insurance, and ACE is

paying claims pursuant to its primary policy.” A plee. Br. at 42. In any event,

§ VI.I serves a clear purpose even under our interpretation of Retained Limit. For

one thing, the actual coverage provided by the ACE policy and the exhaustion of

the limits of that policy affect Great American’s duty (1) to defend Yaffe, see

§ III.A, discussed below , and (2) to make payments for appeal bonds,

prejudgment interest, and costs, see § III.B.3 (regarding litigation expenses).

Thus, § VI.I is not superfluous. Despite the dissent’s arguments, we believe that

the most reasonable reading of §§ I and II.G is that Great American is obligated

to pay once Yaffe has incurred liabilities exceeding $1,000,000.

Other provisions in the Great American policy, however, are less clear than

the above and provide at least some support for G reat American’s construction.

Subsection VI.P of the policy, entitled “When Loss is Payable,” sets independent

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conditions on if (as well as when) Great American must pay. It states, in

pertinent part:

Coverage under this policy will not apply unless and until [Yaffe] or
[Yaffe’s] underlying insurer is obligated to pay the “[R]etained
[L]imit.”

Great A merican policy § VI.P (emphasis added). Initially it may appear that the

plain meaning of the provision is that coverage under the policy begins when

either Yaffe or ACE is obligated to pay $1,000,000. W hen the Coverage

provision of the policy speaks of “sums . . . that [Yaffe] becomes legally

obligated to pay by reason of liability imposed by law,” id. § I, it is undoubtedly

including sums paid by underlying insurance coverage. Thus, when § VI.P refers

to what Yaffe “is obligated to pay,” it must be referring to Yaffe’s legal liability,

regardless of whether Y affe is protected by insurance coverage for that liability.

Because Yaffe has been obligated to pay more than $1,000,000 as the result of the

M uskogee explosion, there would seem to be coverage under the Great American

policy. But this construction of the provision renders the w ords “or [Yaffe’s]

underlying insurer” superfluous because Y affe’s underlying insurer, whose

obligation derives from Yaffe’s, w ould be obligated to pay only when Yaffe itself

would be obligated.

A possible alternative reading of § VI.P that avoids rendering the reference

to Yaffe’s insurer as surplusage would be based on the recognition that umbrella

coverage protects against identified gaps in underlying policies. “Umbrella

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policies differ from standard excess policies in that they are designed to fill gaps

in coverage both vertically (by providing excess coverage) and horizontally (by

providing primary coverage).” Commercial Union Ins. Co., 7 F.3d at 1053. It

may be, therefore, that § VI.P should be read to say that coverage under the Great

American policy applies only when either Yaffe (in the case of an event not

covered by other insurance) or Yaffe’s underlying insurer (in the case of an event

covered by other insurance) is obligated to pay the Retained Limit. Because the

M uskogee explosion is undoubtedly covered by the ACE policy, § VI.P would

then mean that Great American’s obligation is triggered only after ACE has

become obligated to pay $1,000,000— that is, only after the ACE coverage has

been exhausted.

A third reading, which arrives at the same conclusion, is proffered by Great

American and w as adopted by the district court. Under that reading the purpose

and effect of the reference to Yaffe’s obligation in § VI.P is merely to protect

Yaffe in the event of default by its primary insurer, ACE. If ACE, because of

insolvency or unjustified refusal to pay, does not pay its obligations and Yaffe is

forced to pay covered liabilities itself, Great American would count such

payments under § VI.P. This third reading avoids the surplusage problem with

the first reading, but neither Great American nor the district court has explained

how it derived this meaning from the language of the policy.

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 Subsection VI.J, entitled “Other Insurance,” sets a further condition on

payment by Great American. It, too, is subject to more than one reasonable

construction. It states:

If other insurance applies to a loss that is also covered by this policy,
this policy will apply excess of the other insurance. Nothing herein
will be construed to make this policy subject to the terms, conditions,
and limitations of such other insurance. However, this provision will
not apply if the other insurance is specifically written to be excess of
this policy.

Great American policy § VI.J. The phrase “excess of the other insurance” is not

defined in the policy. There is support for Great American’s view that the phrase

means that the policy applies only “after the primary coverage limits have been

exhausted.” U.S. Fid. & Guar. Co. v. Federated Rural Elec. Ins. Corp., 37 P.3d

828, 831 (Okla. 2001) (“Primary insurance provides immediate coverage for the

insured upon the occurrence of a loss or the happening of an event which, under

the terms of the policy, gives rise to immediate liability. . . . An excess insurance

policy is one which by its terms provides coverage that is secondary to the

primary coverage; there is usually no obligation to the insured until after the

primary coverage limits have been exhausted.”).

But a general description of insurance policies, such as that in U.S. Fidelity

& Guaranty Co., must yield to the specific language of a particular policy.

Oklahoma law imposes coverage when “an insured could reasonably have

expected coverage” based on the policy language, M ax True, 912 P.2d at 865;

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and to a reasonable person looking only at this language, the phrase “excess of

the other insurance” could well mean “to the extent that the other insurance is not

required to pay (even if the other insurance applies to the loss).” Under this

reading, § VI.J w ould come into play to limit Great American’s duty to pay only

when both the Great American policy and another policy (in this case, the ACE

policy) require payment. This could happen if, for example, a new $50,000 claim

arising out of the explosion were added to the claims against Yaffe. Because of

the $10,000 per-claim deductible in the ACE policy, ACE would be obligated to

pay $40,000. Because under Yaffe’s construction of the policy the Great

American deductible had been exceeded, Great American would be obligated for

the entire $50,000. Great American would be the only insurer obligated to pay

the first $10,000, so it would owe that sum. As to the remaining $40,000, both

Great American and ACE would be liable, so § VI.J would presumably impose the

obligation on AC E. See Lee R. Russ, Couch on Insurance § 219:1 (3d ed. 2007)

(“‘Other insurance’ clauses govern the relationship between insurers[;] they do

not affect the right of the insured to recover under each concurrent policy.”).

Finally, both parties claim to find support for their positions in § III.A of

the G reat American policy, entitled “D efense.” (Yaffe has not claimed, however,

that Great American actually had any obligation to defend it against any of the

claims arising out of the explosion). It provides:

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 [Great American] will have the right and duty to investigate any
“claim” and defend any “suit” seeking damages covered by the terms
and conditions of this policy when:

1. the applicable Limits of Insurance of the underlying policies
listed in the Schedule of Underlying Insurance and the Limits
of Insurance of any other insurance providing coverage to
[Yaffe] have been exhausted by actual payment of “claims” for
any “occurrence” to which this policy applies; or

2. damages are sought for any “occurrence” which is covered by
this policy but not covered by any underlying policies listed in
the Schedule of Underlying Insurance or any other insurance
providing coverage to [Yaffe].

Great American policy § III.A. Both parties seem to agree that this provision

requires (and permits) Great American to investigate and defend a claim when the

limits of A CE’s coverage have been exhausted. It would seem peculiar, however,

for the policy to require payment by Great American before G reat American’s

right and duty to investigate and defend arises. Great American should not be

required to pay on a claim against Yaffe without having the opportunity to protect

its interests by investigating and defending the claim. Yet that could be the case

under Yaffe’s interpretation of the policy because the duty to pay could arise

before exhaustion of ACE’s coverage, which is w hat triggers the right and duty to

investigate and defend. One could thus infer that the duty to pay must not arise

until the § III.A rights and duties arise— namely, upon exhaustion of the ACE

coverage.

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 But Yaffe has a reasonable contrary argument. It argues that the language

of § III.A shows that the drafters of the policy could require “exhaustion” of

coverage w hen they wanted to. It contends that this section “shows precisely how

unambiguous language can and should provide for a requirement that underlying

insurance be ‘exhausted.’” Aplt. Br. at 27. The failure to use such language in

§§ I and II.G, it contends, therefore shows that the Retained Limit could be

exceeded before exhaustion of the underlying coverage. In our view § III.A does

not unambiguously indicate whether Great American’s obligation to pay begins

only when the ACE policy’s limits have been exhausted.

In sum, we believe that the G reat American policy is susceptible to more

than one reasonable construction; it is not unambiguous. Summary judgment in

favor of Great American on this ground was therefore improper. Furthermore,

Great American does not argue on appeal that it would be entitled to summary

judgment even if the policy were ambiguous, so we do not address such a

possibility and instead conclude that the grant of summary judgment to Great

American must be reversed.

In light of the above discussion, we also must conclude that the district

court’s ground for denying Yaffe’s motion for summary judgment— namely, that

the Great American policy unambiguously indicated that Great American had no

obligation to pay until the ACE policy was exhausted— was erroneous. This does

not mean, however, that Yaffe is now entitled to summary judgment. All we have

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decided is that the Great American policy is ambiguous. Yaffe would have us

take the next step. It contends that it is entitled to summary judgment because (1)

any ambiguity in the policy must be construed against the drafter of the policy,

Great American, and in favor of coverage; and (2) it had a reasonable expectation

that the policy w ould provide coverage. But at this stage of the proceeding w e

must disagree. Great American had no opportunity to respond to Y affe’s

summary-judgment motion, and entry of summary judgment against it would

therefore be improper.

“Federal Rule of Civil Procedure 56 implicitly requires the district court to

allow the nonmoving party an opportunity to respond before summary judgment is

entered against it.” See Beaird v. Seagate Tech., Inc., 145 F.3d 1159, 1163 (10th

Cir. 1998). But the district court granted G reat American’s motion for sum mary

judgment one week after Yaffe filed its motion for summary judgment, well

before Great American’s response was due. In its response Great American may

have pointed to extrinsic evidence that resolved any ambiguity in the policy and

would have defeated Yaffe’s motion. Given the district court’s grounds for its

ruling on the merits, proceeding to deny Yaffe’s motion was hardly improper.

Now that we have reversed that ruling, however, Great American is entitled to an

opportunity to respond to Yaffe’s motion. Accordingly, we must remand for

further proceedings. Cf. Doebele v. Sprint/United M gmt. Co., 342 F.3d 1117,

1139 (10th Cir. 2003) (district court abused its discretion in granting summary

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judgment when it relied on new materials in reply brief without giving the

nonmovant an opportunity to file a surreply; because appellate court was

reversing summary judgment for other reasons, “[a]ny prejudice flowing from

[appellant’s] inability to reply to this material may be corrected on remand”).

C. M otion to Compel Discovery

As an alternative to its argument that it be granted summary judgment,

Yaffe argues for reversal of the district court’s denial of its motion to compel

discovery. The district court denied the motion to compel on the ground that the

Great American policy was unambiguous. Because we have determined that the

relevant terms of the policy are ambiguous, we remand this issue to the district

court for reconsideration.

III. C ON CLU SIO N

W e REVERSE the district court’s grant of summary judgment to Great

American and REM AND for further proceedings.

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No. 06-7057, The Yaffe Companies, Inc. v. Great American Insurance Company

BRISCO E, Circuit Judge, dissenting:

I respectfully dissent. Although the majority concludes “that the district

court’s ground for denying Yaffe’s motion for summary judgment–namely, that

the Great American policy unambiguously indicated that Great American had no

obligation to pay until the ACE policy was exhausted–was erroneous,” M aj. Op.

at 18, in my view it is the majority’s own conclusion that is erroneous.

I.

Before detailing my differences w ith the majority’s decision, I believe it is

useful to briefly revisit the relevant facts of this case and, consistent with our

obligation under Oklahoma law to construe the policy as a whole, to review all of

the relevant Great American policy provisions together. See Bituminous Cas.

Corp. v. Cowen Constr., Inc., 55 P.3d 1030, 1033 (Okla. 2002) (holding that an

insurance policy must “‘be construed according to the entirety of its terms and

conditions set forth in the policy and as amplified, extended, or modified by any

rider, endorsement, or application attached to and made a part of the policy.’”)

(quoting Okla. Stat. tit. 36, § 3621).

Effective October 1, 2004, Great American issued to Yaffe, in exchange for

a premium of $272,310, a “Commercial Umbrella” policy with a policy period of

October 1, 2004, to October 1, 2005. App. at 74, 86. The Great American policy

provided total coverage of $25,000,000 for “[e]ach [o]ccurrence” and in the
aggregate. Id. at 86. The “INSU RING AGREEM ENTS” portion of the Great

American policy provided, in pertinent part, as follow s:

I. C OV ER AG E

W e will pay on behalf of the “Insured” those sums in excess of the
“Retained Limit” that the “Insured” becomes legally obligated to pay
by reason of liability imposed by law or assumed by the “Insured”
under an “insured contract” because of “bodily injury,” “property
damage,” “personal injury,” or “advertising injury” that takes place
during the Policy Period and is caused by an “occurrence” happening
anywhere. The amount we will pay for damages is limited as
described below in the Insurance Agreement Section II. LIM ITS OF
INSU RA NC E.

II. L IM IT S OF IN SU R ANCE

***

G . Retained Limit

W e will be liable only for that portion of damages . . . in excess of
the “retained limit,” which is the greater of:

1. the total amounts stated as the applicable limits of the
underlying policies listed in the Schedule of Underlying
Insurance and the applicable limits of any other
insurance providing coverage to the “Insured” during the
Policy Period; or

2. the amount stated in the Declarations as Self-Insured
Retention [which in this case was “$ -0-”] as a result of any
one “occurrence” not covered by the underlying policies listed
in the Schedule of Underlying Insurance nor by any other
insurance providing coverage to the “Insured” during the
Policy Period;

and then up to an amount not exceeding the Each
Occurrence Limit as stated in the Declarations [i.e.,
$25,000,000].

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App. at 88-89 (emphasis added).

The Great American policy’s “Schedule of Underlying Insurance,” w hich is

referenced in the policy’s definition of “Retained Limit,” listed three different

policies, including “ACE AM ERICAN PO LICY: D35980490” (Ace American

policy) w hich provided commercial general liability and employee benefit

liability to Yaffe for the policy period of October 1, 2004, to October 1, 2005. Id.

at 76. The Schedule of Underlying Insurance stated that the Ace American

policy, to the extent it provided commercial general liability coverage, had a

$2,000,000 general aggregate limit and a $1,000,000 “each occurrence” limit. Id.

Finally, the Great American policy contained the following three (I, J and

P) relevant “CONDITIONS” provisions (which are found in § VI):

I. M aintenance of Underlying Insurance

During the period of this policy, you agree:

1. to keep the policies listed in the Schedule of Underlying
Insurance in full force and effect;

2. that any renewals or replacements of the policies listed in
the Schedule of Underlying Insurance will not be m ore
restrictive in coverage;

3. that the Limits of Insurance of the policies listed in the
Schedule of Underlying Insurance will be maintained except
for any reduction or exhaustion of aggregate limits by payment
of “claims” or “suits” for “occurrences” covered by
“underlying insurance”; and

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 4. that the terms, conditions and endorsements of the policies
listed in the Schedule of Underlying Insurance will not change
during the period of this policy such as to increase the
coverage afforded under the policy.

If you fail to comply with these requirements, we will only be liable
to the same extent that we would have been had you fully complied
with these requirements.

J. O ther Insurance

If other insurance applies to a loss that is also covered by this policy,
this policy will apply excess of the other insurance. Nothing herein
will be construed to make this policy subject to the terms, conditions
and limitations of such other insurance. However, this provision will
not apply if the other insurance is specifically written to be excess of
this policy.

***

P. W hen Loss Is Payable

Coverage under this policy will not apply unless and until any
“Insured” or an “Insured’s” underlying insurer is obligated to pay the
“retained limit.”

W hen the amount of loss has finally been determined, we will
promptly pay on behalf of the “Insured” the amount of loss falling
within the terms of this policy.

Id. at 99-100.

On December 28, 2004, an explosion occurred at Yaffe’s scrap yard in

M uskogee, Oklahoma. Id. at 47. According to Yaffe, it incurred approximately

$1,785,986.89 in total liabilities as a result of various claims resulting from the

explosion. Id. Because, however, a m ajority of those claims w ere for amounts

less than the $10,000 per-claim deductible set forth in the Ace American Policy,

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Ace American provided no coverage for those claims, leaving Yaffe responsible

to pay $1,287,987.79 worth of claims. Id. at 47-48. In other words, Ace

American, to date, has paid only $497,999.10 of the total liabilities incurred by

Yaffe as a result of the explosion, leaving over half-a-million dollars remaining

under the $1,000,000 “per occurrence” limit set forth in the Ace American Policy.

Id. at 48.

Yaffe filed suit against Great American in the District Court of M uskogee

County, Oklahoma. Yaffe’s complaint alleged that Great American had breached

its contract of insurance by failing to reimburse Yaffe for its deductible

obligations, and also sought a declaration that Great American would be obligated

to reimburse Yaffe “for all amounts not covered by Yaffe’s underlying policy [the

Ace American policy], including all deductible payments incurred by Yaffe.” Id.

at 14-17. Alternatively, Yaffe sought a declaration that Great American was

liable for all of Yaffe’s liabilities resulting from the accident that exceeded

$1,000,000, regardless of who paid the first $1,000,000 in claims. Great

American filed an answer, timely removed the action to federal district court, and

then filed a counterclaim seeking a declaration that it had no duty to pay under its

umbrella policy until and unless the limits of the Ace American primary policy

had been paid. The parties subsequently filed cross-motions for summary

judgment. The district court issued an opinion and order granting Great

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American’s motion for summary judgment and denying Yaffe’s cross-motion for

summary judgment.

II.

Turning to the majority’s decision, it is first suggested that “the language in

§ I (Coverage) and § II.G (Retained Limit) of the Great American policy implies

that coverage begins once Yaffe has incurred liabilities exceeding $1,000,000.”

M aj. Op. at 10. W ith this statement, the majority focuses on the phrase “total

amounts,” as employed in § II.G, and omits the introductory requirement that

limits Great American’s liability to only “that portion of damages . . . in excess of

the ‘retained limit.’” The majority then interprets the “total amounts” phrase to

simply refer to a mathematic total equivalent to the applicable limits of any

underlying policies maintained by the insured, in this case $1,000,000, omitting

any requirement that these limits must be paid by the underlying policy insurer(s).

In other words, the majority concludes that the sole purpose of § II.G’s reference

to the “the applicable limits of the underlying policies” is to establish a threshold

dollar amount, above which coverage under the umbrella policy will begin, and

regardless of whether Yaffe or the underlying insurer(s) paid or were liable for

the amounts below the threshold dollar amount.

In my view, this is a misreading of the policy. To begin with, it omits the

key introductory language of § II.G that states Great American “will be liable

only for that portion . . . in excess of the ‘retained limit,’ which is the greater of”

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(1) “the total amount stated as the applicable limits of the underlying policies

listed in the Schedule of Underlying Insurance” (i.e., the Ace American policy,

which had a per occurrence limit of $1,000,000) “and the applicable limits of any

other insurance providing coverage to the ‘Insured’ during the policy period”

(there were no such other policies in place in this case), or (2) “the amount stated

in the Declarations as Self-Insured Retention” (i.e., zero). Although § II.G could

perhaps be more clear, its reference to “the applicable limits of the underlying

policies” was obviously intended, particularly when considered in light of the

other relevant policy provisions, to mean that those limits have to be exhausted

before coverage begins under the Great American policy. To conclude otherwise,

as the majority does, effectively transforms the policy from its intended purpose

as an excess policy into a primary insurance policy with a large deductible. If

that is the proper interpretation, then one must ask why the policy repeatedly

refers to the underlying policies and their applicable limits, and why the policy

requires that those underlying policies be kept in full force and effect? If the

majority’s interpretation were correct, there would be no need to refer at all to

any underlying policies and their applicable limits. Stated differently, it would

have been far simpler for the policy to establish a set deductible amount, rather

than to establish that amount by reference to the applicable limits of the

underlying insurance policies maintained by Yaffe. Notably, the majority

concedes that the purpose of § II.G’s reference to underlying policies maintained

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by the insured is to ensure that the Retained Limit will be “automatically

increased” in the event that the insured “acquire[s] additional underlying

insurance.” M aj. Op. at 11-12. But this concession, with which I agree, makes

sense only if the Great American policy is interpreted as providing excess, rather

than primary, coverage.

The majority further errs in construing § VI.J (“Other Insurance”) of the

policy, which states: “If other insurance applies to a loss that is also covered by

this policy, this policy will apply excess of the other insurance.” Although the

majority acknowledges, as it must, that this language can reasonably be construed

to “mean[] that the policy applies only after the primary coverage limits have

been exhausted,” M aj. Op. at 15 (internal quotation marks omitted), it suggests

that “to a reasonable person . . . the phrase ‘excess of the other insurance’ could

well mean ‘to the extent that the other insurance is not required to pay (even if

the other insurance applies to the loss).’” Id. at 16. In my view , the plain

language of § VI.J has only one reasonable interpretation and that interpretation

clearly refutes the majority’s proposed alternative reading. Specifically, a

reasonable insured in the position of Yaffe could only have read § VI.J to mean

that the Great American policy would provide coverage for a loss only after the

limits of any applicable underlying policies were exhausted.

The majority also reads too much into § VI.P of the Great American policy.

That section, entitled “W hen Loss is Payable” and contained in the “Conditions”

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section of the policy, provides, in pertinent part, that “[c]overage under this

policy will not apply unless and until any ‘Insured’ or an ‘Insured’s’ underlying

insurer is obligated to pay the ‘retained limit.’” App. at 100. Although the

majority speculates on the possible meanings of this provision and its impact on

coverage, the fact is that § VI.P does not purport to modify or otherwise impact

the coverage provisions of the policy. Indeed, the second paragraph of § VI.P

confirms that the point of the subsection (as indicated by its title) is to specify

“when,” not “how much,” Great American is obligated to pay: “W hen the amount

of loss has finally been determined, we will promptly pay on behalf of the

‘Insured’ the amount of loss falling within the terms of this policy.”

Further, the majority all but overlooks § VI.I of the Great American

policy. 1 That section, entitled “M aintenance of Underlying Insurance,” required

Yaffe to keep the underlying policies listed in the schedule of insurance “in full

force and effect” and to maintain the same coverage restrictions, limits, and terms

and conditions during the life of the umbrella policy. Id. at 99. If, as the

majority effectively concludes, the policy’s “retained limit” is nothing more than

a mathematical liability amount that must be reached before coverage begins, then

why would it have been necessary for Yaffe to maintain any underlying policies

1
The majority complains that “G reat American itself” has not expressly
relied on § VI.I to supports its position. M aj. Op. at 12. That complaint,
however, carries no weight in light of our obligation under O klahoma law to
construe the policy “according to the entirety of its terms and conditions . . . .”
Bituminous Cas. Corp., 55 P.3d at 1033 (internal quotation marks omitted).

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during the life of the Great American policy? The only answer the majority can

muster is that “the actual coverage provided by the ACE policy and the

exhaustion of the limits of that policy affect Great American’s duty (1) to defend

Yaffe,” “and (2) to make payments for appeal bonds, prejudgment interest, and

costs . . . .” M aj. Op. at 12. Again, however, this is a grossly distorted, and

unnecessarily limited, reading of the policy language. In fact, the clear and

undeniable purpose of § VI.I’s maintenance of underlying insurance requirement,

consistent with the Great American policy as a whole, was to ensure that the

policy operated as intended, i.e., as an excess liability policy that provided

coverage only after exhaustion of the applicable limits of the underlying primary

policies maintained by Yaffe.

Finally, the majority effectively ignores the fact that the liability incurred

by Yaffe in this case resulted from the existence of multiple claims, and thus the

application of multiple corresponding deductibles, under the Ace American

policy. Although the majority suggests that the Great American policy can be

reasonably construed to operate as an excess policy to fill gaps in the underlying

insurance, it is clear that the deductible amounts that Yaffe was required to pay

under the Ace American policy cannot reasonably be considered “gaps” in that

policy. Rather, deductibles, “which [are] frequently referred to as self-

insurance,” function “to alter the point at which an insurance company’s

obligation to pay will ripen.” Int’l Bankers Ins. Co. v. Arnone, 552 So.2d 908,

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911 (Fla. 1989); see Beech Aircraft Corp. v. United States, 797 F.2d 920, 922

(10th Cir. 1986) (“If one having an insurable risk retains the risk of his own loss,

there is no risk transfer, and the arrangement is self-insurance.”). In other words,

Yaffe, by agreeing to the unusual deductible scheme set forth in the Ace

American policy, chose (presumably in return for a lower premium on that policy)

to accept the risk that it would be required to self-insure in the event of multiple

claims arising out of an occurrence. As the district court correctly noted, “it is

generally understood that ‘an excess insurer does not reimburse the insured for

the amount of the primary policy deductible,’” App. at 511 (quoting Couch on

Insurance, (3d Ed.), § 220:36), and that “[t]he rationale for not including

deductible payments as part of the limits of the underlying policy [wa]s grounded

in the insured’s decision to, in essence, become self-insured for the deductible

amount as a result of the bargain reached with the primary insurer . . . .” Id. at

511; see also Douglas R. Richmond, Issues and Problems in “Other Insurance,”

M ultiple Insurance, and Self-Insurance, 22 Pepp. L. Rev. 1373, 1399 (1995)

(“The purpose of excess coverage or an umbrella policy is to protect the insured

in the event of catastrophic losses in w hich liability exceeds available primary

coverage. Excess and umbrella policies are intended to expand the amount, but

not the scope of coverage. Therefore, only after the underlying primary policy

has been exhausted will any umbrella policies kick in.”) (internal quotation marks

omitted).

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 Considering the Great American policy as a whole, I agree with the district

court that the policy cannot reasonably be construed to provide coverage for the

circumstances alleged in Yaffe’s complaint. Therefore, I agree with the district

court that Great American was entitled to summary judgment in its favor, and I

would affirm the judgment of the district court.

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