Federal Insurance Company, an Indiana corporation v. St. Paul Fire & Marine Insurance Company, a Minnesota corporation

This disposition is not appropriate for publication and is not precedent*
except as provided by 9th Cir. R. 36-3.
NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FEDERAL INSURANCE COMPANY, an
Indiana corporation,
Plaintiff - Appellant,
v.
ST. PAUL FIRE & MARINE
INSURANCE COMPANY, a Minnesota
corporation,
Defendant - Appellee,
and
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH PA, a
Pennsylvania corporation,
Counter-defendant.
No. 09-15413
D.C. No. 5:05-cv-01878-JW
MEMORANDUM*
Appeal from the United States District Court
for the Northern District of California
James Ware, District Judge, Presiding
Argued and Submitted October 7, 2010
San Francisco, California
FILED
OCT 14 2010
MOLLY C. DWYER, CLERK
U .S. C OU R T OF APPE ALS

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The Honorable Ronald B. Leighton, United States District Judge for**
the Western District of Washington, sitting by designation.
Before: RYMER and N.R. SMITH, Circuit Judges, and LEIGHTON, District
Judge.**
Federal Insurance Company appeals the district court’s judgment in favor of
St. Paul Fire & Marine Insurance Company. The district court had jurisdiction
pursuant to 28 U.S.C. §§ 1332 and 2201, and we have jurisdiction pursuant to 28
U.S.C. § 1291. We reverse and remand for recalculation of the parties’
obligations.
I
In California, an insurer owes a broad duty to “defend a suit which
potentially seeks damages within the coverage of the policy,” Vernon Dartmouth
Gray v. Zurich Ins. Co., 419 P.2d 168, 176 (Cal. 1966), “or if the complaint might
be amended to give rise to a liability that would be covered under the policy,”
Montrose Chem. Corp. of Cal. v. Superior Court, 861 P.2d 1153, 1160 (Cal. 1993).
“Any doubt as to whether the facts establish the existence of the defense duty must
be resolved in the insured’s favor.” Id. So it is only “in an action wherein none of
the claims is even potentially covered because it does not even possibly embrace
any triggering harm of the specified sort within the policy period caused by an

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The language of an insurance policy is to be construed against the insurer.1
Gray, 419 P.2d at 172 n.7.
For this purpose we assume (as St. Paul argues) that it was Federal’s initial2
burden to show the possibility that the exception applies. See Sony Computer
Entm’t America, Inc. v. Am. Home Assurance Co., 532 F.3d 1007, 1020 n.8 (9th
Cir. 2008).
included occurrence, the insurer does not have a duty to defend.” Scottsdale Ins.
Co. v. MV Transp., 115 P.3d 460, 466 (Cal. 2005).
There is no dispute about the duty to defend once Fujitsu’s second amended
complaint was filed, but we believe the obligation to defend was triggered earlier,
when Fujitsu brought a counterclaim in Cirrus’s 2001 action. We cannot say that
the allegation in that pleading – that unpredictable short-circuiting after the chips
were put to their intended use rendered Fujitsu’s drive inoperable – “does not even
possibly” embrace harm contemplated by the “sudden and accidental” exception to
the impaired property exclusion. Id.; Anthem Elec. Inc. v. Pac. Emp’r Ins. Co., 302
F.3d 1049, 1059 (9th Cir. 2002). The policy’s example of “sudden and accidental”
damage supports this conclusion. Nor does the extrinsic evidence upon which St.1
Paul relies regarding the cause of the short-circuits lead to a different result, as it
fails to “negate[ ] all facts suggesting potential coverage.” Scottsdale, 115 P.3d at
466. Thus, the counterclaim gave rise to the possibility that the exception to the
exclusion applies.2

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We remand to the district court so that the parties may recalculate their
obligations consistent with this disposition.
II
Federal waived its claim to indemnity under St. Paul’s Commercial General
Liability policy, as it failed to preserve this issue before the district court.
REVERSED AND REMANDED.

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