Appeal from the United States District Court for the District of Arizona; Roger G. Strand, District Judge, Presiding; DC No. CV-89-0492-PHX-RG.
Hug, Poole, and Ferguson, Circuit Judges.
Holbrook Unified School District No. 3 ("Holbrook") appeals the district court's granting of summary judgment in favor of California Insurance Company ("CIC") on Holbrook's action for breach of an insurance contract and bad faith. Holbrook contends the district court erred by concluding that Holbrook was not entitled to coverage under a CIC insurance policy for attorneys' fees, costs, and expenses it incurred in defending a lawsuit (the "Clark action") alleging that Holbrook had discriminated against Native Americans in its process of electing members to the school board, in violation of the Voting Rights Act of 1965 (42 U.S.C. § 1973). We affirm.
Arizona law requires the following rules of construction to be applied in interpreting insurance contracts:
[A]mbiguous terms in a contract of insurance are to be strictly construed in favor of the insured and coverage, and against the insurer. In this context, if an insurer wishes to limit its liability, it must employ language in the policy which clearly and distinctly communicates to the insured the nature of the limitation. The principle of strict construction applies, however, only after the contested language of the policy has been determined to be ambiguous. . . . An ambiguity exists when the language of the policy is unclear and could be construed in more than one sense.
Roberts v. State Farm Fire & Cas. Co., 146 Ariz. 284, , 705 P.2d 1335, 1336- 37 (1985) (en banc) (citations omitted). In general, insurance contracts are construed "to protect the reasonable expectations of the insured." Phoenix Control Systems v. Ins. Co. of N. Am., 165 Ariz. 31, , 796 P.2d 463, 466 (1990) (en banc).
In addition, an insurance policy is required to be construed from a layman's perspective for its "plain and ordinary meaning," and "must be read as a whole in order to give a reasonable and harmonious meaning and effect to all of its provisions." Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529, , , 647 P.2d 1127, 1132, 1134 (en banc), cert. denied, 459 U.S. 1070 (1982) (citation omitted). Significantly, the Arizona Supreme Court has recently noted, in a decision holding that certain insurers were not liable for punitive damages in automobile insurance policies, that "when a question of interpretation arises, we are not compelled in every case of apparent ambiguity to blindly follow the interpretation least favorable to the insurer." State Farm Mut. Auto. Ins. Co. v. Wilson, 162 Ariz. 251, , , 782 P.2d 727, 733, 736 (1989) (en banc). Instead, "the rule in Arizona is that . . . a clause subject to different interpretations [is construed] by examining the language of the clause, public policy considerations, and the purpose of the transaction as a whole." Id. at , 782 P.2d at 733 (citation omitted).
In applying these rules of construction under Arizona law, we hold that the district court properly upheld CIC's denial of coverage under the CIC policy.
The "Coverage I" provision of the CIC policy provides, in relevant part, as follows:
COVERAGE I. To pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of the liability imposed by law, or the liability of others assumed or retained under contract for damages, including damages . . . because of personal injury. . . .
(Emphasis added). "Personal injury" is defined in the policy, in relevant part, as "injury because of . . . [r]acial . . . discrimination. . . ."
Holbrook contends it is entitled to coverage because the liability it incurred as a result of defending the Clark action falls within the scope of the term "damages" as that term is used but not expressly defined in the policy. We disagree ...