869 F. 2d 1498 - State Farm Mutual Automobile Insurance Company v. Hearn

No. 87-3752.

United States Court of Appeals, Ninth Circuit.

Before FLETCHER and NOONAN,* Circuit Judges, and EARL H. CARROLL,** District Judge.

MEMORANDUM***

State Farm Mutual Automobile Insurance Co. (State Farm) brought a declaratory judgment action against David and Jeannine Hearn to resolve whether State Farm is liable to pay pre-judgment interest to the Hearns under an auto insurance policy. On cross-motions for summary judgment, the district court ruled in favor of the Hearns, and State Farm appealed. We reverse.

In March 1985, while driving in Anchorage, Alaska, Laura Schaal lost control of her vehicle, crossed the median strip, and struck a vehicle occupied by the Hearns, who suffered bodily injuries from the accident. Schaal was insured under a policy issued by State Farm, which provided liability coverage under the following applicable provisions.

"SECTION I--LIABILITY--COVERAGE A

".....

"We will:

1. pay damages which an insured becomes legally liable to pay because of:

a. Bodily injury to others, and

b. damage to our destruction of property including loss of its use,

caused by accident resulting from the ownership, maintenance or use of your car; and

2. defend any suit against an insured for such damages with attorneys hired and paid by us. We will not defend any suit after we have paid the applicable limit of our liability for the accident which is the basis of the lawsuit."

Immediately following the general insuring agreement, the insurance contract also set forth this "interest clause":

"In addition to the limits of liability, we will pay for an insured any costs listed below resulting from such accident.

"1. Court costs of any suit for damages.

"2. Interest on all damages owed by an insured as the result of a judgment until we pay, offer or deposit in court the amount due under this coverage."

(Emphasis in original.) The policy also declared a limit of liability for bodily injury of $100,000 per person and $300,000 per accident. State Farm offered to settle the Hearns' claims arising from the accident for $200,000 (the policy limit), but the Hearns rejected the offer.

The only issue before the district court was whether State Farm is liable for paying all pre-judgment interest ultimately assessed against its insured, even though such pre-judgment interest would exceed the policy limits. The district court ruled that the "interest clause" quoted above was ambiguous and therefore had to be construed against the insurer as providing coverage for all pre-judgment interest without respect to the stated limits of liability. We review de novo a district court's interpretation on summary judgment of an insurance contract. Allstate Ins. Co. v. Ellison, 757 F.2d 1042, 1044 (9th Cir.1985).

The policy in question provides coverage, within the policy limits, for "damages which an insured becomes legally liable to pay because of ... bodily injury to others ..." (emphasis in original). Additionally, State Farm's policy agrees to pay specified "costs ... resulting from such accident," including "[i]nterest on all damages owed by an insured as a result of a judgment until we pay, offer or deposit in court the amount due under this coverage."

State Farm contends that this "interest clause" covers only post-judgment interest. The Hearns contend that the language covers all interest, both pre- and post-judgment, without regard to the limits of liability. The district court agreed with the Hearns, finding that State Farm's policy language "is ambiguous because of its silence as to the handling of pre-judgment interest. State Farm chose language which on its face appears broadly to assure liability for interest payments." Mem. at 3. Had State Farm intended to exclude pre-judgment interest from the interest clause, according to the district court, it could have employed standard insurance-industry language stating that "the insurer shall pay":

all interest accruing after entry of judgment until the company has paid or tendered or deposited in the court such part of such judgment as does not exceed the limit of the company's liability thereon.

Mem. at 4 (quoting 2 Long, Liability Insurance Sec. 9.01).

Under Alaska law, the provisions of an insurance policy are construed to provide the coverage which a lay person would have reasonably expected, given a lay interpretation of the policy language. Stordahl v. Gov't Employees Ins. Co., 564 P.2d 63, 66 (Alaska 1977). Coverage should be construed broadly, with ambiguities resolved in favor of the insured. Hahn v. Alaska Title Guaranty Co., 557 P.2d 143, 144-45 (Alaska 1976). The Alaska courts have held that pre-judgment interest accrues from the date of the plaintiff's injury. See State v. Phillips, 470 P.2d 266, 274 (Alaska 1970). Pre-judgment interest is deemed to compensate the plaintiff for loss of the use of funds, equivalent to the value of plaintiff's injury, from the date of injury to the date of judgment. See Guin v. Ha, 591 P.2d 1281, 1286 (Alaska 1979). The district court concluded that the phrase "interest on all damages" in the State Farm policy could only be reasonably interpreted as obligating the insurer to pay all interest until tender of payment of a judgment or settlement, including pre-judgment interest.

We might be inclined to agree with the district court's conclusion, but for the decision in Guin v. Ha, which the district court did not consider. In Guin, the Alaska Supreme Court held that an insurer is not liable for pre-judgment interest in excess of policy limits, because pre-judgment interest is an element of damages that comes within the damages liability limit. Id. at 1286-87. Although the policy at issue in Guin, unlike the policy here, contained no promise by the insurer to pay interest (specifically, post-judgment interest), we find that difference immaterial. The Guin court decided that pre-judgment interest was included within the meaning of the phrase "all sums which the [insured] shall by law be held liable to pay for damages." Id. at 1286 (emphasis in original). Under Guin, then, the phrase in the State Farm policy "all damages owed by an insured as the result of a judgment" must likewise be construed to include pre-judgment interest. Accordingly, the interpretation that best comports with Guin is to construe the term "Interest" in State Farm's "interest clause" as post-judgment interest, accruing from the time of judgment or settlement until the insurer's tender of payment.1

We REVERSE the district court's grant of summary judgment for the Hearns and denial of summary judgment for State Farm. Summary judgment should be entered in favor of State Farm.