Opinion
Guy Blase, Lawrence A. Klein, Spaeth, Blase & Farman, Palo Alto, for appellants.
Jones & Daniels and Robert E. Jones, Los Angeles, for respondents.
MOLINARI, Presiding Justice.
This is an appeal by plaintiffs from a declaratory judgment. Plaintiffs commenced this action seeking a judicial determination of their rights and duties under an errors and omissions indemnity insurance policy issued to plaintiff corporations by defendants. In essence, the declaration sought by plaintiffs was directed to the meaning of the deductible feature of the policy and its application to defense costs.
Statement of the Case
Defendants, foreign organizations engaged in the business of writing insurance in California through duly qualified brokers, issued to plaintiffs an architect or engineers professional indemnity insurance The policy "indemnifies the Assured [plaintiffs] against any claim or claims for breach of professional duty * * * which may be made against them during the period * * * by reason of any negligent act, error or omission, * * * " The policy further provides that defendants "shall not be liable for any claim or claims unless the amount of claim exceeds the amount stated in the said Schedule as the deductible, * * * " The deductible stated in the schedule is $2,500.
The policy does not directly impose a duty on defendants to defend actions against plaintiffs. The matters of defense and defense costs are mentioned only in the "conditions" to the policy as follows: "2. The Assured shall not admit liability for or settle any claim or incur any costs or expenses in connection therewith without the written consent of the Underwriters, who shall be entitled at any time to take over and conduct in the name of the Assured the defense of any claim. [p] Nevertheless, the Assured shall not be required to contest any legal proceedings unless the Lawyer (to be mutually agreed upon by the Assured and the Underwriters) shall advise that such proceedings should be contested. 3. The Underwriters shall not settle any claim without the consent of the Assured. If, however, the Assured shall refuse to consent to any settlement recommended by Underwriters and shall elect to contest or continue any legal proceeding in connection with such claim, then the Underwriters' liability for the claim shall not exceed the amount for which the claim could have been so settled, together with the costs and expenses incurred with their consent * *. "
The dispute below centered around defendants' position that their liability is limited to stipulations where the actual claim paid plus applicable defense costs actually total more than the deductible amount of $2,500. It was plaintiffs' position that defendants had an actual duty to defend and that defendants were required to pay defense costs whenever the initial demand against plaintiffs exceeded the deductible, no matter what the outcome of the demand.
Findings of Fact and Conclusions of Law
Among other things the trial court found that the policy was neither ambiguous nor uncertain; that under the terms of the policy defendants were not required to defend plaintiffs against the claims or demands of third parties for alleged breach of professional duty within the purview of the policy; that defendants' obligation under the policy arises only if the liability of plaintiffs is fixed and is discharged in an amount exceeding the deductible $2,500; and that in accordance with the policy and Civil Code, section 2778, subdivision 3, defendants are also obligated to reimburse plaintiffs for costs and attorney fees incurred and paid by plaintiffs in the defense of claims embraced within the provisions of the policy, that is, those claims in excess of $2,500 actually paid by plaintiffs.
Unless otherwise indicated, all statutory references hereinafter made are to the Civil Code.
Other findings and conclusions of the court are discussed below where particularly pertinent to the contention under consideration.
The court then concluded that the policy is neither ambiguous nor uncertain and that defendants are obligated to reimburse plaintiffs for attorney's fees, costs and expenses incurred in the defense of any claim only when the claim is paid by plaintiffs and only when the payment exceeds $2,500. Judgment was entered accordingly.
The Question of Ambiguity
Plaintiffs first contend that the trial court was in error in concluding that the insurance policy was not ambiguous. They maintain that the policy is ambiguous because it is not clear whether defendants had a duty to defend them against all claims coming within the purview of the policy, and also that the use of the word Wachs v. Wachs,
N. C. Roberts Co. v. Topaz Transformer Products, Inc., Harabedian v. Zurich Ins. Co.,In the instant case plaintiff was permitted to present extrinsic evidence for the purpose of establishing that it was the intent of the parties that the policy afford plaintiffs the right to recover defense costs and expenses regardless of the amount paid by plaintiffs as the result of a claim of a third party. This evidence was properly admitted, preliminarily, for the purpose of considering all credible evidence offered to prove the intention of the parties and as relevant to prove a meaning to which the language of the instrument was reasonably susceptible. (See Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co., 69 Cal.2d 33, 39-40, 69 Cal.Rptr. 561, 442 P.2d 641; Delta Dynamics, Inc. v. Arioto, 69 Cal.2d 525, 528, 72 Cal.Rptr. 785, 446 P.2d 785.) This evidence was admitted subject to defendants' motion to strike, which was timely interposed. The trial court took the motion under submission and in its written memorandum of decision stated that it was unecessary for the court to rule on the motion on the basis that there was nothing in the evidence offered by plaintiffs which showed an intent of the parties contrary to that expressed in the policy. The effect of this ruling was to indicate that the evidence objected to tended to prove a meaning of which the language of the instrument is reasonably susceptible. Accordingly, the evidence was relevant to prove such meaning and it was, therefore, admissible. The failure to rule formally is an implied ruling against the objection and in favor of admissibility. Since defendants prevailed in the court below they make no claim of error with respect to the admissibility of such extrinsic evidence.
This procedure was proper. (See Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., supra, 69 Cal.2d 33, 40, fn. 7, 69 Cal.Rptr. 561, 442 P.2d 641; and see Evid.Code, § 403.)
The trial judge, in his memorandum opinion, states as follows: "A fair interpretation of the correspondence of the parties relating to the negotiations for the insurance coverage and the testimony given at the trial confirms the understanding of the underwriters as expressed in the policy. It demonstrated that the underwriters did not agree to pay costs of defense unless they authorized and undertook the defense or unless the plaintiffs paid a claim in an amount exceeding $2500.00 previously consented to by them in writing."
In the light of the foregoing, the following rules with respect to the interpretation of contracts are applicable: (1) Where the trial court has properly admitted extrinsic evidence to aid in the interpretation of an agreement and that evidence is such that conflicting inferences can be drawn from conflicting evidence, the appellate court will accept or adhere to the trial court's interpretation (Parsons v. Bristol Development Co., 62 Cal.2d 861, 865-66, 44 Cal.Rptr. 767, 402 P.2d 839; McManus v. Sequoyah Land Assoc., 240 Cal.App.2d 348, 353, 49 Cal.Rptr. 592, 20 A.L.R.3d 1015; Coronet Credit Corp. v. West Thrift Co., 244 Cal.App.2d 631, 641, 53 Cal.Rptr. 433); and, (2) where extrinsic evidence has been received, but there is no conflict in the evidence of a determination has been made upon incompetent evidence, the interpretation of the instrument becomes a question of law and the appellate court is not bound by the trial court's interpretation of it. (Parsons v. Bristol Development Co., supra, at pp. 865-866, 44 Cal.Rptr. 767, 402 P.2d 839; Estate of Platt, 21 Cal.2d 343, 352, 131 P.2d 825; McManus v. Sequoyah Land Assoc., supra, at p. 353, 49 Cal.Rptr. 592, 20 A.L.R.3d 1015). We also agree with the principle which plaintiffs extract from Gray v. Zurich Insurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, to the effect that "In interpreting an insurance Adverting to the extrinsic evidence we note that Donald Brown, plaintiffs' insurance broker, testified that he discussed with Ralph Jackson, a surplus line underwriter for Appleton & Cox of California, Inc., the local agents for defendants, how the deductible operated in relationship to the defense costs; and that when he told Jackson, following the receipt of a policy form and prior to the issuance of the policy, that he could not "interpret" the exact action that would be taken if claims did occur, Jackson advised him that there would be a $2,500 deductible applicable to a claim under the policy and that legal fees would be taken care of under the policy without a deductible. Brown also testified that he later got a different interpretation from Jackson when he asked Jackson to contact the underwriters directly to get an interpretation from them, and that he was advised by the underwriters that the interpretation made by plaintiffs was completely wrong. He testified that this communication was not received until early 1967.
Guy Blase, an attorney for plaintiffs, also testified that prior to the issuance of the policy he too had a conversation with Jackson concerning defense costs. He testified that Jackson told him that if a claim was in excess of the deductible then defense costs would be paid "from the ground up," that is, that in any case involving a claim in excess of $2,500 defense costs in their entirety would be paid by the insurer, but that if the claim was less than $2,500 defense costs would not be indemnified.
Avery Tindell, vice-president of Appleton & Cox in charge of surplus line operations, testified that on July 24, 1964 he sent a letter to Blase to the effect that they were not liable for the defense of claims not "likely to exceed the $2,500 deductible." Ralph Jackson testified that he advised Blase that as far as the deductible was concerned the defense costs would be included "from the ground up" provided the claim exceeded the deductible, and that by the term "from the gound up" he (Jackson) meant from the first dollar, provided the claim exceeded $2,500. Jackson also testified that by the term "claim" he meant the claim made by the assured against the assurer, and not the claim made by a third party against the assured.
In addition to the foregoing extrinsic evidence, several letters and a cablegram were admitted into evidence. A letter dated April 3, 1964, from Jackson to the underwriters' representative in London, indicated an understanding that the deductible would not apply to defense costs and that if plaintiffs used their own attorney in cases where the claim was under the deductible, the use of such attorney was in order but at the assured's cost. The same letter stated that if the claim was in excess of the deductible and the plaintiffs had used their own attorney and his use was approved by the underwriters, the total legal cost would be borne by the underwriters. This letter requested a verification by cable of this understanding. The response to this letter with respect to the matter of defense was by a cablegram, dated April 8, 1964, which, in pertinent part, read: "* * * please refer to policy Conditions One and Two." Another letter, dated April 8, 1964, from Jackson to Brown, with a copy to Blase, directed attention, with respect to defense, to conditions 1, 2 and 3 of the insuring agreement and noted that these "will be found to be self-explanatory." Another letter, dated July 22, 1964, from the claims manager of Appleton & Cox, confirmed the understanding had with Jackson on the question of fees. Blase responded to this letter on July 24, 1964, by a letter wherein he stated, "I feel it is clear that only in the event that a claim appears to exceed $2,500.00 will the Underwriter assume The extrinsic evidence further discloses that plaintiffs gave defendants notice of certain claims and the course of action being taken by plaintiffs with respect to said claims, but that in each instance plaintiffs voluntarily undertook the defense of such claims. The record is devoid of any evidence that plaintiffs at any time requested or demanded that defendants assume the defense of any claim.
Adverting to the question of ambiguity, we conclude that the subject policy was ambiguous both on its face and also because, as appears from the extrinsic evidence, it was susceptible of either one of the two interpretations contended for. It was ambiguous on its face because the language of the policy does not clearly delineate the matter of defense costs. Moreover, when the language employed is fairly susceptible of either one of two interpretations contended for, then ambiguity arises and extrinsic evidence may be resorted to for the purpose of showing the circumstances under which the language was used and applying it according to the intent of the parties. (See Balfour v. Fresno Canal & Irrigation Co., 109 Cal. 221, 225, 41 P. 876; Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., supra, 69 Cal.2d 33, 39-40, 69 Cal.Rptr. 561, 442 P.2d 641.) With respect to such entrinsic evidence it was such that conflicting inferences could be drawn from conflicting evidence. Accordingly, the trial court drew inferences which proved the meaning contended for by defendants. These inferences find support in the evidence.
In the instant case it is apparent that the trial court resorted to the inferences it drew from the instrument itself and the extrinsic evidence in making its findings relative to the intention of the contracting parties and the meaning to be given to the subject provisions of the policy. Accordingly, since extrinsic evidence was resorted to as an aid in interpreting the policy and that evidence is such that conflicting inferences can be drawn from the conflicting extrinsic evidence, we will accept the trial court's interpretation. We are satisfied, moreover, in the light of the record, that when the trial court concluded that the policy was not uncertain and ambiguous it did so after that ambiguity was removed by the inferences the court drew from the extrinsic evidence and after it had resolved all doubts as to meaning against defendants. In this regard, we observe that although there was some conflicting evidence the extrinsic evidence clearly preponderated in favor of the meaning contended for by defendants.
The trial court and the parties relied upon section 2778 in interpreting the policy, and in making its findings the trial court examined the policy together with the applicable provisions of that section which sets out the rules for interpreting an agreement of indemnity. That section provides that in the interpretation of a contract of indemnity the rules therein set out apply "unless a contrary intention appears." (Emphasis added.) In the instant case it is apparent from the trial court's memorandum opinion and its findings that these rules were examined
Section 2778 reads in pertinent part: "In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears: 1. Upon an indemnity against liability, expressly, or in other equivalent terms, the person indemnified is entitled to recover upon becoming liable; 2. Upon an indemnity against claims, or demands, or damages, or costs, expressly, or in other equivalent terms, the person indemnified is not entitled to recover without payment thereof; 3. An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion; 4. The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so; * * *."
The "Claim"
As previously noted, the subject policy "indemnifies the Assured against any claim or claims for beach of professional duty * * *." Plaintiffs contend that under the terms of the policy they are entitled to recover from defendants all costs and expenses incurred by them during the policy period in contesting claims of third parties where the demand of the third party exceeds $2,500. In this connection they assert that the word "claim" means all third party claims, whether or not actually paid.
Subdivision 2 of section 2778 provides that "Upon an indemnity against claims, or demands, * * * or costs, * * * the person indemnified is not entitled to recover without payment thereof." This rule of interpretation was utilized by the trial court in finding that "The obligation of UNDERWRITERS under the policy arises only if the liability of plaintiffs exceeds the deductible amount of $2,500.00." This finding imports a determination by the trial court that this rule was applicable on the basis that no "contrary intention" appears from the extrinsic evidence adduced. (See San Pedro Properties, Inc. v. Sayre & Toso, Inc., 203 Cal.App.2d 750, 756, 21 Cal.Rptr. 844.)
The "Memorandum Decision" which we are entitled to use for the purpose of discovering the process by which the trial judge arrived at his conclusions (Union Sugar Co. v. Hollister Estate Co., 3 Cal.2d 740, 750, 47 P.2d 273; Henderson v. Fisher, 236 Cal.App.2d 468, 472, 46 Cal.Rptr. 173), indicates that the trial court specifically applied this rule. The trial court notes that "* * * a policy which indemnifies against any claim is not one which indemnifies against 'liability' but, rather, is one which imposes the obligation upon the indemnitor only if the indemnitee has paid a claim for which coverage is provided in the policy. Thus the liability occurs only when an actual loss has been sustained by the indemnitee."
The Duty to Defend
The subject policy does not set out any underlying obligation to defend against the claims covered by the policy. In condition 2 defendants are given the right to require plaintiffs to undertake the defense of claims, but there is no other provision which gives plaintiffs the reciprocal right to require defendants to defend. Plaintiffs urge that the duty to defend arises from an application of the rule of interpretation provided for in subdivision 4 of section 2778 which provides: "The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so; * * *."
The trial court found that defendants were not obligated under the terms of the policy to defend plaintiffs against the claims or demands of third parties; that plaintiffs may be required by defendants to contest legal proceedings arising out of such demand or claim if a mutually agreed upon lawyer advised that any such proceedings should be contested; and that plaintiffs at no time requested or demanded that defendants assume or undertake the defense of any demand or claim, or legal proceeding arising out of such claim or demand, but voluntarily undertook the defense of all such demands, claims and litigation. The trial court also found by applying subdivision 3 of section 2778 that defendants were only obligated to reimburse plaintiffs for the costs, expenses and attorney fees in the defense of claims actually paid by plaintiffs in a sum in excess of the deductible amount of $2,500. Subdivision 3 of section 2778 provides that an indemnitor has an obligation to reimburse In his "Memorandum Decision" the trial judge indicates that subdivision 3 must be considered in connection with subdivision 2 with respect to what is meant by indemnification of a "claim," and that the costs and expenses referred to in subdivision 3 are those attendant to a claim which results in a loss within the purview of subdivision 2. With respect to subdivision 4, the trial court indicates that this rule was not applicable because there was no showing that defendants failed to assume the defense of claims after request was made. The trial court noted, moreover, that even if a request were made to defend, this duty would only arise in respect to the matters embraced by the indemnity, that is, those cases where the obligation to reimburse for a claim paid exceeded the deductible. In this regard we observe that subdivision 4 is applicable only in the absence of a contrary intent. Here the extrinsic evidence was susceptible of a contrary intent. From this evidence the inference can be drawn that the parties did not intend that defendants would undertake the obligation of defense.
The trial court noted that defendants "in each instance could stand by and assume the risk that the loss to the assureds might exceed the deductible amount, in which event they would become obligated to not only pay the assureds the excess loss but also all expenses and costs including attorney fees."
Plaintiffs also argue that mention of "costs and expenses" in the condition of the policy also indicates that it was the purpose of the policy to impose the duty to defend. This contention is without merit. As pointed out above, these costs and expenses are embraced and payable under the rule set out in subdivision 3 of section 2778.
Condition number 1 to the policy reads: "The total liability of the Underwriters hereunder in respect of all claims made against the Assured in any one policy year * * * together with the costs and expenses incurred in the defense of any claim shall not exceed the sum stated in the said Schedule."
Plaintiffs make a related argument that the "duty to defend" is broader than the "duty to indemnify." However, the cases relied on (Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168; Lowell v. Maryland Casualty Co., 65 Cal.2d 298, 54 Cal.Rptr. 116, 419 P.2d 180; Fireman's Fund Ins. Co. v. Chasson, 207 Cal.App.2d 801, 24 Cal.Rptr. 726), all involve policies including an express obligation to defend.
Reasonable Expectation
Plaintiffs obviously interpret the subject policy as covering all defense costs where the original prayer is for an amount exceeding the deductible, regardless of the amount of the final claim. They maintain that this interpretation is in line with their "reasonable expectations" and should therefore be recognized by this court. Plaintiffs rely particularly on a statement in Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, to the effect that: "Although courts have long followed the basic precept that they would look to the words of the contract to find the meaning which the parties expected from them, they have also applied the doctrine of the adhesion contract to their insurance policies, holding that in view of the disparate bargaining status of the parties we must ascertain that meaning of the contract which the insured would reasonably expect." (Pp. 269-270, 54 Cal.Rptr. pp. 171-172, 419 P.2d pp. 107-108.)
A contract of adhesion is "* * * a standardized contract which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it." (Kessler, Contracts of Adhesion (1943) 43 Colum.L.Rev. p. 629; see Schmidt v. Pacific Mut. Life Ins. Co., 268 A.C.A. 793, 794, 796, 74 Cal.Rptr. 367.) Contracts of adhesion concerning insurance which are ambiguous Atlantic Nat. Ins. Co. v. Armstrong,
The Gray case is factually distinguishable from the instant case. There the policy contained a specific provision requiring the insurance carrier to defend the insured against claims for bodily injury, and the issue was whether the insured was covered for a claim for an intentional tort in view of the excluded coverage in the policy for intentional torts. The Supreme Court there noted the rule of Steven v. Fidelity & Casualty Co., 58 Cal.2d 862, 878, 27 Cal.Rptr. 172, 377 P.2d 284, to the effect that where the insurer deals with the public on a mass basis, the notice of noncoverage, in a situation in which the public may reasonably expect coverage, must be conspicuous, plain and clear. (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 271, 54 Cal.Rptr. 104, 419 P.2d 168.) Accordingly, in Gray, the court took note of the "disparate bargaining status" (p. 270, 54 Cal.Rptr. 104, 419 P.2d 168) as between an insurance carrier and a layman and held under the circumstances before it that uncertainties in an insurance policy must be resolved in favor of the insured and its provisions interpreted "according to the layman's reasonable expectations." (Pp. 274-275, 54 Cal.Rptr. pp. 110-111. 419 P.2d pp. 184-175.)
In the instant case we do not have the "disparate bargaining status" found to exist in Gray. Moreover, the question of plaintiffs' reasonable expectations was one of fact for the trial judge in ascertaining the intention of the parties in view of the fact that there was no specific provision requiring defendants to defend. The judge was justified in concluding that the extrinsic evidence removed any uncertainties as to the policy coverage. We observe, moreover, that the question of an insured's reasonable expectations turns on the insured's intentions with respect to the coverage sought. (See Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 274, fn. 13, 54 Cal.Rptr. 104, 419 P.2d 168; Meyer v. Pacific Employers Ins. Co., 233 Cal.App.2d 321, 327-328, 43 Cal.Rptr. 542.) In the case at bench the trial court found, essentially, that plaintiffs did not reasonably expect or intend that defendants would afford plaintiffs a defense to claims or suits brought against them.
The DeJaeger Claim
Plaintiffs contend that defendants are obligated to reimburse for the defense and settlement of a suit arising out of work done by a corporation (Hersey Testing & Controls, Inc.) dissolved in 1962. Plaintiffs argue that this liability subsists against defendants because the Gribaldo and Hersey shareholders are the same. The trial court found that the work in question was performed prior to the incorporation of plaintiff Gribaldo, et al., and that certain shareholders of Hersey acted as organizers and officers of plaintiff Gribaldo. The court further found that the policy does not obligate defendants to indemnify for work performed by parties other than plaintiff. We agree with the interpretation of the trial court. The policy as issued in 1964 clearly insures against beach of The Palo Alto Unified School District Claim
The court specifically found: "That the claim asserted against the plaintiff, GRIBALDO, JACOBS, JONES & ASSOCIATES, for allegedly liability arising out of engineering work performed by Hersey Testing & Controls, Inc., a corporation, is not a claim covered by the subject policy of insurance and UNDERWRITERS have no obligation to said plaintiff by reason of such claim. The policy provides coverage only for plaintiffs and only for claims arising out of alleged negligent acts, errors or omissions committed by plaintiffs or their employees. The claim arising out of work performed by Hersey Testing & Controls, Inc. is not such a claim."
The trial court found that plaintiff Testing & Controls, Inc. had forgiven certain fees due from the Palo Alto Unified School District in order to avoid a third party claim by the school district. The court also found that the consent of defendants to the forgiveness was never obtained. Plaintiffs do not directly challenge this finding which is, in any event, supported by the record. Since policy condition number 2 specifically precludes settlement without written consent of defendants, we are compelled to conclude that plaintiffs' contention is without merit and that the analysis of the trial court is correct.
The trial court found that the forgiveness of a debt as consideration for the settlement of a claim imposes an obligation upon defendants to reimburse plaintiffs for the debt forgiven and the expenses incurred in defense of the claim if the debt forgiven exceeds $2,500, provided the forgiveness was made with the express consent of defendants.
The judgment is affirmed.
SIMS and ELKINGTON, JJ., concur.