Dennis J. Connolly, in his capacity as Plan Administrator for SONICblue, Inc. v. Admiral Insurance Company

* 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NOT FOR PUBLICATION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
DENNIS J. CONNOLLY, in his capacity
as Plan Administrator for SONICblue,
Inc.,
Plaintiff - Appellee,
v.
ADMIRAL INSURANCE COMPANY,
Defendant - Appellant,
and
OLD REPUBLIC INSURANCE
COMPANY,
Defendant.
No. 11-15784
D.C. No. 5:09-cv-04853-JF
MEMORANDUM*
Appeal from the United States District Court
for the Northern District of California
Jeremy D. Fogel, District Judge, Presiding
Argued and Submitted December 4, 2012
San Francisco, California
FILED
DEC 12 2012
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

-- 1 of 4 --

2
Before: O’SCANNLAIN, THOMAS, and CALLAHAN, Circuit Judges.
Admiral Insurance Company (“Admiral”) appeals the grant of summary
judgment to David Connolly, Plan Administrator for SONICblue (“Connolly”).
Because the parties are familiar with the history of this case, we need not recount it
here. We affirm in part and reverse in part.
I
The district court erred, in part, in determining that Admiral was entitled
only to be reimbursed for the amount it expended to defend the underlying action
up to the date of rescission.
Connolly’s interpretation of Admiral’s obligation is inconsistent with Gon v.
First State Insurance Co., 871 F.2d 863, 868 (9th Cir. 1989), which required the
insurance company to “pay all legal expenses of all insureds as they are incurred,”
even after the insurer had filed a complaint for rescission. 871 F.2d at 865. Upon
rescission of the policy, “[t]he policy would be ‘extinguished’ ab initio, as though
it had never existed. In other words, [SONICblue and the directors], in law, never
were insureds under a policy of insurance.” Imperial Cas. & Indem. Co. v.
Sogomonian, 243 Cal. Rptr. 639, 646-47 (Cal. Ct. App. 1988).
After rescinding the policy, Admiral paid to defend the underlying action
only after expressly “reserv[ing] its rights” under the original policy and under

-- 2 of 4 --

3
Buss v. Superior Court, 939 P.2d 766, 784 n.27 (Cal. 1997). Buss explained that
“[t]hrough reservation, the insurer gives the insured notice of how it will, or at
least may, proceed and thereby provides [the insured] an opportunity to take any
steps that it may deem reasonable or necessary in response – including whether to
accept defense at the insurer’s hands and under the insurer’s control or, instead, to
defend itself as it chooses.” 939 P.2d at 784 n.27 (internal citations omitted). At
any time, SONICblue could have accepted the rescission and defended itself in its
claim. See id. (agreeing that “the insurer can reserve its right of reimbursement for
defense costs by itself, without the insured’s agreement.”).
The California Supreme Court confirmed its view on this issue in Scottsdale
Insurance Co. v. MV Transportation, 115 P.3d 460 (Cal. 2005), in which it held
that where the insurer properly reserved its rights, it could “obtain reimbursement
of its expenses of defending its insured against a third party lawsuit, when it is
ultimately determined, as a matter of law, that the policy never afforded any
potential for coverage, and that a duty to defend never arose.” 115 P.3d at 462.
“[A]n insurer, having reserved its right to do so, may obtain reimbursement of
defense costs which, in hindsight, it never owed.” Id. at 467-68; see also LA Sound
USA, Inc. v. St. Paul Fire & Marine Ins. Co., 67 Cal. Rptr. 3d 917, 926-27 (Cal.
Ct. App. 2007) (holding that “reimbursement here is required by rescission”

-- 3 of 4 --

4
because “[u]nlike a Buss mixed action, in this case [the insurer]’s duty to defend
was nonexistent from the inception.”).
Therefore, we reverse the amount of the district court’s award of judgment,
and instead award judgment to Connolly and against Admiral in the amount of
$85,956.12, which is the difference between the $675,000 net premium
SONICblue paid to Admiral, and $589,043.88, which is the amount paid by
Admiral to defend the underlying action, plus all applicable interest.
II
The district court did not err in concluding that Admiral was not entitled to
recover the attorneys fees and costs it expended on the coverage issue. Admiral
neither “br[ought] an action to recover” its attorneys fees nor “assert[ed] such
rescission by way of defense or cross-complaint” in Connolly’s present action for
restitution. Cal. Civ. Code § 1692. It only raised the issue in its response to a
Motion for Summary Adjudication. Under these circumstances, the district court
acted within its discretion in determining that Admiral’s claim for attorneys fees
had not been properly asserted.
AFFIRMED IN PART; REVERSED IN PART.
Each party shall bear its own costs.

-- 4 of 4 --