908 F. 2d 976 - First State Insurance Company v. Federal Savings and Loan Insurance Corporation

MEMORANDUM*

First State Insurance Company ("First State") appeals the district court's grant of summary judgment in favor of appellees fourteen Chang individuals and David B. Laing (the Chang/Laing defendants), who are present and former directors and officers of Gateway Savings and Loan Association ("Gateway"), in First State's declaratory relief action for rescission of a liability insurance policy. At issue is the interpretation of a clause in the policy (Clause VIII) by which First State insured the officers and directors of Gateway. First State argues that Clause VIII allows it to impute to other officers and directors material misrepresentations made by the subscribing officer, thereby voiding coverage as to even innocent officers and directors. In contrast, appellees contend that Clause VIII disallows such imputation, and voids coverage only as to the subscribing officer who made the misrepresentations. The district court found Clause VIII ambiguous and, applying a presumption in favor of the insureds, granted summary judgment in favor of appellees. Because we do not believe Clause VIII is ambiguous, we reverse.

In 1983, Alan Gon, then president of Gateway, applied for and obtained the officers and directors liability insurance policy from First State Insurance Company. Several months prior to the execution of the application, the Federal Home Loan Bank Board had begun investigating Gateway for unsafe banking practices. The Board later declared Gateway insolvent, and on April 14, 1986, appointed the Federal Savings and Loan Service Corporation (FSLIC) to take over the bank. On May 4, 1987, FSLIC brought an action against Gon and eight other former corporate officers and directors (the "Gon" defendants) alleging various improper transactions. The Chang/Laing defendants were not included in the action. On September 15, 1987, the Gon defendants filed suit against First State Insurance Company for its refusal to defend in the FSLIC action.

In July of 1987, First State learned that material misrepresentations had been made by Gon in the Gateway insurance application. On January 20, 1988, First State filed the instant rescission action to declare the policy void ab initio with regard to all Gateway officers and directors based on the material misrepresentations made in the application by Gon.

At issue in the rescission action is the meaning of a 119-word clause ("Clause VIII") contained in the policy issued by First State to the officers and directors of Gateway Savings Bank. The issue is whether the clause allows First State to rescind the policy as to all officers and directors because of Gon's misrepresentations, or whether it only permits rescission as to Gon.

In July of 1988, the Chang/Laing defendants moved for summary judgment on First State's complaint for rescission. They argued that the language of the clause did not permit Gon's misrepresentations to be imputed to other innocent insureds. Alternatively, they argued that in the event of linguistic ambiguity, California law applies a presumption in favor of the insured.

That Gon made material misrepresentations was not in issue for purposes of the summary judgment motion. Nor was it disputed that none of the Chang/Laing defendants was involved in the application for insurance. Thus the only issue was the interpretation of the policy.

On September 16, 1988 the district court granted Chang/Laing's motion for summary judgment. The court found the policy language to be ambiguous, and that, in the event of ambiguity, California law requires a construction favoring the insured.

This court reviews de novo decisions granting summary judgment. Bank of California, N.A. v. Opie, 663 F.2d 977, 979 (9th Cir.1981). We will affirm a grant of summary judgment if it appears from the record, after viewing all evidence and factual inferences in the light most favorable to the appellant, that there are no genuine issues of material fact and that the appellee is entitled to prevail as a matter of law. Heiniger v. City of Phoenix, 625 F.2d 842, 843 (9th Cir.1980).

It is a basic principle of insurance contract interpretation that ambiguities arising out of policy language should ordinarily be resolved in favor of the insured in order to protect his reasonable expectation of coverage. Producers Dairy Delivery Company, Inc., v. Sentry Insurance Company, 41 Cal.3d 903, 912, 226 Cal.Rptr. 558, 562, 718 P.2d 920 (1986). It is also well established, however, that this rule of construction applies only when the policy language is found to be ambiguous. Id. A policy provision is ambiguous when it is capable of two or more constructions, both of which are reasonable. Delgado v. Heritage Life Ins. Co., 157 Cal.App.3d 262, 271, 203 Cal.Rptr. 672, 677 (1984). Whether language in a contract is ambiguous is a question of law. Id. at 270, 203 Cal.Rptr. at 676. Finally, a finding of ambiguity cannot be based on a strained interpretation of the policy language. McKee v. State Farm Fire & Cas. Co., 145 Cal.App.3d 772, 776, 193 Cal.Rptr. 745, 746 (1983).

Our inquiry, then, is whether the policy language at issue is reasonably susceptible to two interpretations. Bearing the preceding standards in mind, we turn to the clause at issue:

In issuing this Policy the insurer has relied on the declarations and statements which are contained in the proposal form (a copy of which is attached hereto) and which are deemed to be incorporated in this Policy, provided, however, that except for material facts or circumstances known to the person who subscribed the proposal form, any misstatement or omission in such proposal form in respect of a specified Wrongful Act by a particular Director or Officer or his cognizance of any matter which he has reason to suppose might afford grounds for a future claim against him shall not be imputed to any other Director or Officer for purposes of determining the availability of coverage under this Policy.

The district court concluded that this sentence was ambiguous on its face. We disagree. Although the sentence is difficult, upon careful parsing we do not find that it is reasonably susceptible to appellees' proffered interpretation. Clause VIII states that "except for material facts or circumstances known to the person who subscribed the proposal form ... any misstatement or omission in such proposal form ... shall not be imputed to any other Director or Officer." Thus, facts and circumstances known to non-signing officers and directors which could lead to a claim under the policy cannot be imputed to any other officer or director for purposes of determining coverage. However, the clause clearly makes an exception for "material facts or circumstances known to the person who subscribed the proposal form."

Appellees argue that Clause VIII voids coverage only as to the subscribing officer who made the knowing misstatements. We find this interpretation untenable. Neither in their briefs nor at oral argument were appellees able to explain how the language of Clause VIII yields such a meaning. We do agree with appellees that Clause VIII is atrociously drafted and wastefully difficult. We decline to extend the definition of ambiguity, however, to encompass language that is difficult but not reasonably susceptible to the interpretation proffered by the party claiming ambiguity.1

REVERSED.