Douglas Harp, a California resident v. CONVERIUM INSURANCE (NORTH AMERICA), INC., Erroneously Sued As Converium Insurance,…

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
DOUGLAS HARP, a California resident,
and LEADING EDGE TRUCKING, INC.,
a California corporation,
Plaintiffs - Appellants,
v.
CONVERIUM INSURANCE (NORTH
AMERICA), INC., Erroneously Sued As
Converium Insurance, Inc., DBA Allied
World Reinsurance Company, DBA Finial
Insurance Company,
Defendant - Appellee.
No. 13-55282
D.C. No. 5:12-cv-00760-ODW-
DTB
MEMORANDUM*
Appeal from the United States District Court
for the Central District of California
Otis D. Wright II, District Judge, Presiding
Submitted February 11, 2015**
Pasadena, California
Before: CALLAHAN, WATFORD, and OWENS, Circuit Judges.
FILED
FEB 13 2015
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
* This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
** The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).

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1. Under California law, the implied covenant of good faith and fair dealing
requires insurers to accept reasonable settlement offers within policy limits.
Comunale v. Traders & Gen. Ins. Co., 328 P.2d 198, 201 (Cal. 1958). However,
no breach occurs if an insurer refuses to accept a settlement that does not release all
of its insureds, since an insurer owes a duty to each insured and “cannot favor the
interests of one insured over the other.” Lehto v. Allstate Ins. Co., 36 Cal. Rptr. 2d
814, 821–22 (Ct. App. 1995); accord Strauss v. Farmers Ins. Exch., 31 Cal. Rptr.
2d 811, 814 (Ct. App. 1994); see also Lewis v. Telephone Emps. Credit Union, 87
F.3d 1537, 1545 (9th Cir. 1996) (mandating that federal courts follow state
intermediate appellate court decisions where no decision from the state’s highest
court is on point and there is “no convincing evidence” that the highest court
would decide differently). Because Douglas Harp’s policy-limit demand expressly
excluded Mesa Contracting, Converium was obligated to accept the settlement
only if Mesa was not an insured party; if Mesa was an insured party under the
policy, then Converium properly refused the offer.
When the settlement offer was made, Converium properly considered Mesa
to be an insured party. An “insured” includes “both the named insured(s) and
anyone else included in the policy’s definition of ‘insured.’” Am. States Ins. Co. v.

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Progressive Cas. Ins. Co., 102 Cal. Rptr. 3d 591, 597 (Ct. App. 2009) (internal
quotation marks omitted). Mesa was included in the policy’s definition of an
insured: George Armitage was an “insured,” insureds also included “[a]nyone
liable for the conduct of an ‘insured,’” and Harp’s underlying suit contended that
Mesa was vicariously liable for Armitage’s conduct. Under identical policy
language, id. at 599, 602, at least one California court has held that parties who are
potentially vicariously liable count as insured parties. Id. at 602. Thus, Converium
properly viewed Mesa as an insured party and could not have accepted Harp’s
policy-limits settlement offer excluding Mesa without breaching the implied
covenant of good faith and fair dealing.
2. That the jury later exonerated Mesa does not mean that Converium could
have ignored Mesa when the settlement offer was made. At that point, of course,
Converium did not know the jury would ultimately find that Mesa was not
vicariously liable. An insurer “must defend its insured whenever it ascertains facts
that give rise to the potential of liability under the policy.” Id. at 597. When the
settlement offer was made, it was possible that the jury would find Mesa
vicariously liable, as Harp had alleged in his complaint, and Converium therefore
properly considered Mesa an insured party.

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3. That Mesa had not tendered a defense to Converium when the settlement
offer was made is immaterial. Because the policy language created a possibility of
liability, as discussed above, Converium had a duty to defend Mesa.
Harp and Leading Edge argue that Mesa’s late tender of its defense, after the
settlement offer had expired, was prejudicial, such that Converium could have
settled without Mesa and later defended its decision by pointing to Mesa’s late
tender. That argument is without merit. The two cases Harp and Leading Edge
cite for support, Select Insurance Co. v. Superior Court, 276 Cal. Rptr. 598 (Ct.
App. 1990), and Earle v. State Farm Fire & Casualty Co., 935 F. Supp. 1076
(N.D. Cal. 1996), are distinguishable. Those cases concerned prejudice to insurers
not because of late tender but because of late notice; the insureds failed to provide
notice altogether of the underlying actions for which the insurers were alleged to
have a duty to defend until after initial judgments had been rendered. Select Ins.
Co., 276 Cal. Rptr. at 600 (notice after summary judgment); Earle, 935 F. Supp. at
1078 (notice after jury verdicts). Converium, which had been involved in Leading
Edge’s defense from early on in the litigation, suffered no analogous prejudice.
AFFIRMED.

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