Appeal from the United States District Court for the Northern District of California. D.C. No. CV-89-2903-SC. Samuel Conti, District Judge, Presiding.
Before: Thomas Tang, Robert Boochever, and Harry Pregerson, Circuit Judges. Opinion by Judge Boochever.
BOOCHEVER, Circuit Judge:
This appeal involves a dispute between a primary insurer and an excess insurer, arising out of an automobile accident and a consequent wrongful death action. Royal Insurance Company appeals the entry of summary judgment in favor of Sequoia Insurance Company in Sequoia's action to recover the portion of the wrongful death judgment it paid in excess of policy limits. As is common in insurance disputes, the threshold issue with which we are presented is policy coverage. Beyond that, this case also presents a novel question under California law: whether in an action brought by a primary insurer, an excess insurer may raise defensively or by way of a declaratory judgment counterclaim the primary insurer's alleged bad faith breach of the duty to settle. Finally, we must determine whether the primary insurer failed to keep the excess insurer adequately informed of the underlying litigation, and if so, whether summary judgment for the primary insurer was nonetheless proper.
The auto accident which led to this insurance dispute occurred in April 1981. Frank Ramirez was a passenger in a Dodge Ram Charger truck owned by Pleasant Prairie Farms and driven by Ronald Brock. Brock was test driving the truck after doing some mechanical work on it. Another vehicle allegedly pulled out in front of the Ram Charger at a cross street. Brock, who was driving in excess of the speed limit, swerved to avoid the other vehicle, skidded across the intersection, and collided with a palm tree. Ramirez was killed instantly.
Pleasant Prairie Farms insured its truck under a policy issued by Sequoia Insurance Company. Brock held an insurance policy on his 24-foot Winnebago recreational vehicle (RV) issued by Royal Insurance Company. Ramirez' survivors brought a wrongful death action against Pleasant Prairie Farms and Brock, among others. See Ramirez v. Brock, No. 279230-7 (Cal. Super. Ct. 1985). Sequoia defended its insured, Pleasant Prairie Farms. After unsuccessful settlement negotiations, in which Sequoia rejected repeated offers from the Ramirez plaintiffs to settle within its $500,000 policy limits, the case went to trial. A jury awarded the plaintiffs $700,000. Sequoia paid the judgment in full.
A year and a half after the jury verdict and while the case was on appeal, Sequoia sought reimbursement for the excess from Royal. When Royal denied the excess claim, Sequoia sued for declaratory relief, subrogation, and contribution. Royal counterclaimed for equitable subrogation and a judicial declaration that it was not liable, based on Sequoia's alleged bad faith failure to settle. The district court entered judgment for Sequoia on Sequoia's motion for summary judgment. The court declared that Royal's policy provided excess coverage for the accident. It rejected Royal's equitable subrogation counterclaim, ruling that Royal lacked standing as a subrogee because it had not yet paid the disputed amount. Finally, it ordered Royal to pay Sequoia its $100,000 policy limits, plus a pro rata share of post-judgment defense costs and interest. This timely appeal followed. We have jurisdiction under 28 U.S.C. § 1291, and we reverse the summary judgment and remand.
We review the district court's grant of summary judgment de novo, examining the record and making all factual inferences in favor of Royal, as the nonmoving party, to determine whether a genuine issue of material fact exists or whether Sequoia, as the moving party, is entitled to judgment as a matter of law. See State Farm Mut. Auto. Ins. Co. v. Khoe, 884 F.2d 401, 404 (9th Cir. 1989). This is a diversity case arising in California, and California law applies. Allstate Ins. Co. v. Smith, 929 F.2d 447, 449 (9th Cir. 1991).
Royal's policy provided primary insurance on Brock's Winnebago RV. The threshold dispute in this case is whether it also provided insurance on an excess basis for Brock's operation of certain vehicles he did not own under the policy's "Individual Named Insured" endorsement. The parties agree that this endorsement provides coverage only if a four-wheel RV like Brock's Winnebago comes within the policy's definition of "four wheel private passenger automobile." The district court concluded that an RV does come within this definition, and that therefore Royal's policy provided excess coverage for Brock's operation of the truck involved in the accident. We agree.
The pertinent portions of the policy provide:
BASIC AUTOMOBILE DECLARATIONS
Description of owned automobile or trailer Winnebago 24 ft.
BASIC AUTOMOTIVE LIABILITY AND PHYSICAL DAMAGE POLICY
When used in this policy (including endorsements forming a part hereof):
"automobile" means a land motor vehicle, trailer, or semi-trailer designed for travel on public roads . . . .
VII. Additional Definitions
"private passenger automobile" means a private passenger or station wagon type automobile and any automobile the purpose of use of which is stated in ...