[00:00:08] Speaker 03: Good morning, your honors. [00:00:09] Speaker 03: May it please the court. [00:00:11] Speaker 03: I'm Stephen Ellison, and I represent Appellant Houston Casualty Company, or HCC as I'll refer to them. [00:00:17] Speaker 03: And I'd like to reserve five minutes for rebuttal, please. [00:00:19] Speaker 03: Keep your eye on the clock. [00:00:20] Speaker 03: We'll try to help you. [00:00:21] Speaker 03: I will, your honor. [00:00:21] Speaker 03: Thank you. [00:00:23] Speaker 03: The district court's judgment below violates bedrock principles of California insurance law instituted by the California Supreme Court in Brant and Blue Ridge starting nearly 40 years ago. [00:00:36] Speaker 03: The district court's ruling [00:00:37] Speaker 03: ignores the well-established right of insurer to pay claims, reserve rights, and then bring a declaratory relief and recruitment action on disputed coverage issues. [00:00:50] Speaker 03: In so doing, the district court essentially created a new tort of bad faith initiation of litigation. [00:00:57] Speaker 03: Such an expansion of bad faith is unsupported in California law and would create uncertainty and delay [00:01:05] Speaker 03: to the clear detriment of injured third parties is for this most fundamental reason that the district court's judgment should be reversed. [00:01:14] Speaker 03: Now, it's important to start with the undisputed fact that HCC paid the full $2 million of benefits due under the insurance policy issued to Appellee Sebus to settle third party claims while reserving its rights to dispute coverage under a variety of coverage defenses. [00:01:33] Speaker 03: But there was no denial of benefits. [00:01:36] Speaker 03: After all the payments were made to the third party claimants and the policy exhausted, HCC brought an action for declaratory relief and recruitment of those settlement payments under established California law. [00:01:47] Speaker 03: Now the district court, to be sure, ultimately decided against HCC on those coverage issues. [00:01:53] Speaker 03: But it then went a giant step further in the phase two of its proceedings. [00:01:57] Speaker 03: It found HCC in bad faith for maintaining its coverage positions by instituting this litigation. [00:02:04] Speaker 03: Now, the damages awarded by the district court were CBIS's attorney's fees occurred in defending against the coverage litigation, not damages from delaying or withholding benefits, those had been stipulated out of the case, and not some other category of damages caused by the alleged bad faith. [00:02:20] Speaker 03: It was solely for HCC exercising its statutory rights under California law to file a declaratory relief action. [00:02:29] Speaker 03: Now, if allowed to stand, this ruling would place insurers in an untenable position. [00:02:34] Speaker 03: Either, on the one hand, pay claims that they in good faith believe are uncovered with no opportunity for recovery without the risk of this now viable bad faith counterclaim for unreasonable, and that's the standard under bad faith, initiation of litigation. [00:02:51] Speaker 03: That's your one choice. [00:02:52] Speaker 03: Or the other choice you could have as an insurer is to outright deny payment of the claims, leaving the third parties uncompensated while, for some indeterminate amount of time, [00:03:03] Speaker 03: while a declaratory judgment action is filed and decided along with another inevitable bad faith counterclaim. [00:03:09] Speaker 04: Okay. [00:03:10] Speaker 04: I appreciate that learned presentation, which I think sets out in an overall sense what the issue is. [00:03:19] Speaker 04: I'd like you to focus more on what the record shows. [00:03:23] Speaker 04: The undisputed part of the record shows is related to the farmers' claims that arise from physical damage. [00:03:29] Speaker 04: Was it all of their claims or only part of their claims? [00:03:33] Speaker 03: I think that that was the entirety of the underlying basis of their claims. [00:03:39] Speaker 03: Their claims were measured by crop yield loss. [00:03:42] Speaker 03: That's how you would measure the damages. [00:03:44] Speaker 04: And I take that point. [00:03:46] Speaker 04: Let's just say, argue, Wendell, that I, at least I, would agree with you that this has to do with physical damage and that the damage of the crops here is what we're talking about. [00:03:55] Speaker 04: What I want to know is, is the undisputed allegation that the entire claim [00:04:02] Speaker 04: covered damage to crops or just a portion of it? [00:04:05] Speaker 03: Well, the farmers' claims were never turned into a complaint here. [00:04:12] Speaker 03: So there was never underlying complaints that we could manage. [00:04:14] Speaker 03: They were making claims, often very informally. [00:04:17] Speaker 03: There were claim forms, they were all sort of identical, that were submitted that didn't have that level of detail that we would expect. [00:04:27] Speaker 04: If that's right. [00:04:29] Speaker 04: Let's just say we agree with you that the district court got this wrong in terms of what happened here. [00:04:34] Speaker 04: That you need to show, you would show that this is physical damage, therefore it's not covered. [00:04:41] Speaker 04: They would claim it was. [00:04:43] Speaker 04: Don't you need to have a trial on that? [00:04:45] Speaker 04: I mean, there's an unjust enrichment claim that never got processed down there. [00:04:48] Speaker 04: But if you're right, don't we need to send it back for the court to try that issue? [00:04:52] Speaker 04: In other words, what actual portion of the, what was it, million nine roughly, [00:04:58] Speaker 04: is, if you will, legitimately attributable to damage to crops. [00:05:05] Speaker 03: Right? [00:05:06] Speaker 03: Yes. [00:05:06] Speaker 03: And I would say that does not need to, Your Honor. [00:05:09] Speaker 03: And here's why. [00:05:11] Speaker 03: The issue is, it's an interpretation of the policy, which is an issue for the court. [00:05:16] Speaker 03: It's de novo. [00:05:17] Speaker 03: And whether, how, there was not a dispute as to the facts. [00:05:21] Speaker 03: The court did not find summary judgment should be denied because of a genuine dispute of fact. [00:05:27] Speaker 03: Accepted the facts parties brought cross motions on that point and I get that now. [00:05:31] Speaker 04: We can't go back on the summary judgment I'm trying to focus in on What's undisputed right what what I'm not sure based on looking at the record whether 100% of the 1.9 million that was paid was attributable to physical damage to crops if it was then that we don't need to send that part back, but if it was never Litigated we don't know what portion [00:05:56] Speaker 04: was attributable to physical damage, right? [00:05:58] Speaker 03: I would suggest that it was, and I think the most clear evidence of that is the report in the record of Jerry Cass, who was the expert that went out and interviewed the farmers. [00:06:07] Speaker 04: And where is that in the record, please? [00:06:08] Speaker 03: I'll get that for you in just one second, Your Honor, if I can grab my glasses. [00:06:11] Speaker 03: Mr. Cass's report is at five excerpts of record, page 685 is where it starts. [00:06:22] Speaker 03: It's several pages. [00:06:24] Speaker 03: And in that he says... 685? [00:06:26] Speaker 03: 685. [00:06:26] Speaker 03: Thank you, Your Honor. [00:06:29] Speaker 01: And would we consider him an agreed expert of the parties? [00:06:32] Speaker 03: He was not a litigation retained expert. [00:06:35] Speaker 03: He was retained during the claims handling portion of it. [00:06:39] Speaker 03: Mr. Cass was suggested to HCC by SEVIS, that was an expert they put forward, and the parties agreed to use Mr. Cass to help essentially adjust and evaluate the claims. [00:06:52] Speaker 03: Mr. Cass says at that page in his report that all the growers he visited tell the same story. [00:06:59] Speaker 03: And he says there that the crops emerged and were growing vigorously until the herbicide was applied. [00:07:06] Speaker 03: And then he says, and I'm quoting, then the canola plants became discolored, twisted, and stopped growing for three to four weeks. [00:07:12] Speaker 04: And I did see that. [00:07:13] Speaker 04: And so if that's right and it's not rebutted, then you would argue it's 100%. [00:07:18] Speaker 04: But I don't think it really says that. [00:07:20] Speaker 04: That it just says that's what he saw. [00:07:23] Speaker 04: But there was no finding by the court, right? [00:07:25] Speaker 04: That that's what it was? [00:07:26] Speaker 03: Well, the court didn't. [00:07:28] Speaker 03: The court found that the evidence was undisputed and found that it was irrelevant that that's what it was. [00:07:32] Speaker 04: Yeah, I get that part. [00:07:33] Speaker 04: That's the legal part. [00:07:34] Speaker 04: Correct. [00:07:35] Speaker 04: But in terms of the factual part, there's no finding by the district court that the application of the herbicide, pesticide, whatever it is, diminished, ruined the crops, right? [00:07:50] Speaker 03: I think the court accepted that fact because the parties didn't dispute it. [00:07:55] Speaker 04: Okay, but does that mean for purposes of our panel that we should assume that the record shows that if your opponent's wrong on the law and the district court was wrong on the law that 100% of what you paid was attributable [00:08:11] Speaker 04: to the property damage and therefore you get it all back without anything further. [00:08:15] Speaker 03: Yes, Your Honor, that is our position. [00:08:17] Speaker 01: Can I ask you one more factual question? [00:08:18] Speaker 01: I'm sorry, Judge. [00:08:19] Speaker 01: After the three to four weeks, what happened? [00:08:22] Speaker 01: You just read from his report that things went south for three to four weeks. [00:08:26] Speaker 01: Then what happened? [00:08:27] Speaker 03: Right. [00:08:27] Speaker 03: And so then they, I think in some instances, those crops [00:08:31] Speaker 03: Did not catch up so to speak and then they hit a hard freeze that year in September Which was a little early as my understanding most of these were growers in the Western provinces of Canada and that so therefore that locked in that damage and and that that word and then the damage measure of the measurement of those damages within the reduced yield and [00:08:55] Speaker 03: So I think that they never caught up was the word that I believe the agronomist used, the crops never caught up. [00:09:02] Speaker 04: That to me suggests that there are some factual disputes that need to be resolved. [00:09:10] Speaker 04: If we agree, arguendo, that you're right on the law and the district court got it wrong, the amount that you get back would have to be determined in a new trial or some type of tribunal, would it not? [00:09:22] Speaker 04: Because you've got freeze, you've got [00:09:25] Speaker 04: this one expert we don't know much about that. [00:09:28] Speaker 04: Isn't that a fair statement? [00:09:30] Speaker 03: I think that if, and if we're just focusing on the coverage issue, not the bad faith issue. [00:09:35] Speaker 04: That's right. [00:09:35] Speaker 04: For the moment, just coverage. [00:09:37] Speaker 03: If you're just focusing on the coverage issue, I suppose there is, I understand the court's concern that the record may not be have as fully developed as the court suggests. [00:09:49] Speaker 03: But I would return to the fact that when the parties had the opportunity to dispute that, neither did. [00:09:55] Speaker 03: And instead submitted it to the court and said, you can decide this, Your Honor. [00:09:59] Speaker 04: And he didn't. [00:10:00] Speaker 04: Because he never got to that point. [00:10:01] Speaker 04: He just went on the law, from his perspective, right? [00:10:04] Speaker 03: Yeah, from Judge Bichans. [00:10:05] Speaker 03: Yes, she did. [00:10:05] Speaker 03: That is exactly it. [00:10:06] Speaker 03: That's OK. [00:10:07] Speaker 03: And yes, she determined two things. [00:10:11] Speaker 03: One, she did an interpretation of the policy. [00:10:14] Speaker 03: And I think we lay out in our brief why we think that was incorrect under the canons of interpretation. [00:10:18] Speaker 03: And then two, reached the conclusion after that interpretation that it wasn't property damage because focused on the measurement [00:10:26] Speaker 02: The of the damages as a legal matter as opposed to the actual tangible harm to the crops yes, I I thought about thinking about this issue and trying to figure out what would not count as property damage You know which is defined as physical injury [00:10:48] Speaker 02: Including the loss resulting from the physical injury so I it also has if I recall correctly the word rising from or resulting from And so it seems like you know Am I correct in thinking that the interpreting that language that doesn't require? [00:11:06] Speaker 02: A jury or something that doesn't require that that is like legal interpretation. [00:11:10] Speaker 02: It's or statutory interpretation except in this case contractual interpretation so [00:11:14] Speaker 02: that would not be driven by so would that the reach of that language would be something that either we need to decide or the district court needs to decide is that correct correct your honor that is a matter of law and then and then i think it's the laws pretty clear that arising from resulting from this language that gets interpreted pretty broadly like it extends we've seen we said that another and so i was trying to think of what what does not i mean if there's an early freeze and the plants aren't and the reason you have [00:11:43] Speaker 02: reduced yield is because the plants are not far enough along. [00:11:51] Speaker 02: That loss would seem to have result from the fact that the plants got set back by this. [00:11:59] Speaker 02: And so that would seem to be covered. [00:12:01] Speaker 02: It got physically set back. [00:12:02] Speaker 02: So I was trying to think, what would not be covered? [00:12:04] Speaker 02: And the thing I could think of, and I'm curious as to what your position, and obviously your opposing counsel, what would not be covered. [00:12:11] Speaker 02: The thing I could think of was, [00:12:13] Speaker 02: if there was a middle man, you know, that sold these canola seeds, right, and they sold, and their reputation was ruined by this or something like that, and so now nobody buys from them anymore. [00:12:23] Speaker 02: So they didn't experience any physical harm from anything, but their reputation is ruined, and so they've got a reputational harm, and so they could sue. [00:12:34] Speaker 02: That would not be physical. [00:12:35] Speaker 02: But I, that's the only type of thing I could think of would not, and maybe I'm not being creative enough, [00:12:42] Speaker 03: That and and i don't i don't i didn't see anything like that in this record i didn't see the farmer saying our reputation is ruined or something like that There was not let me give you a i think your honors example could be one let me give you one that maybe even is a little closer to our facts but would be on the other side which is and there's a couple cases that were cited here if a Seedsman puts in the wrong kind of seed so i need canola seed and i accidentally put in [00:13:10] Speaker 03: I think one case it was goat grass. [00:13:11] Speaker 03: It was a weed, a noxious weed. [00:13:14] Speaker 03: And the weed comes up and it doesn't harm the plants. [00:13:16] Speaker 03: In other words, the weed just sits there, right? [00:13:18] Speaker 03: There is one case that says that's not property damage because it didn't harm the other plants. [00:13:24] Speaker 03: It just wasn't the seed it was supposed to be. [00:13:26] Speaker 03: Or make it even more simple. [00:13:28] Speaker 03: I ordered canola seed and you sent me corn. [00:13:31] Speaker 03: and I plant my property, wait a minute, I bought canola, I didn't buy corn, that would not be harmed to the plants, the corn plants grow up, they're perfectly fine, but that would be something that would not be a problem. [00:13:44] Speaker 02: You don't have much time, but this is kind of really important because my colleague George Smith raises an important point about, and I was thinking about, is there a factual dispute here that needs to go back? [00:13:52] Speaker 02: And I'm trying to think of the [00:13:57] Speaker 02: Just to be clear, the interpretation of what constitutes physical damage or property damage and the reach of that, especially combined with the rising from, that's not really a factual issue that would need to. [00:14:08] Speaker 02: We could determine that, just as well, in fact, sort of cut off the middleman, but cut off the district court. [00:14:14] Speaker 02: It would only be if we thought that there was some sort of damage that does not fit within that might plausibly be included here. [00:14:21] Speaker 02: That's why I'm struggling with what that would be. [00:14:23] Speaker 02: I need to ask your colleague on the other side about that. [00:14:27] Speaker 03: Yes, and your honor, I'm happy to address it, but I do only have a few seconds left. [00:14:29] Speaker 04: We'll give you a little extra time because we're taking a little bit over, but why don't you save the rest of your time for rebuttal? [00:14:35] Speaker 03: I will, your honor. [00:14:36] Speaker 04: We'll get you back here. [00:14:37] Speaker 03: Thank you, sir. [00:14:38] Speaker 04: All right, so Mr. Brown. [00:14:49] Speaker 00: Good morning, your honors. [00:14:50] Speaker 00: May it please the court [00:14:52] Speaker 00: I'm Doug Brown, it's my privilege and pleasure to represent SEBIS in this matter. [00:15:00] Speaker 02: As I understood the district court's reasoning here, the district court basically said this is not property damage covered by the property damage clause of this contract. [00:15:16] Speaker 02: There's a couple reasons. [00:15:17] Speaker 02: The district court said, because that would upset the expectation of the parties, let's put that aside for a second, but just like interpreting the language. [00:15:26] Speaker 02: Basically said, well, they're not asking for, the farmers were not asking for recompense for the damage. [00:15:35] Speaker 02: They were asking for recompense from the yield loss. [00:15:40] Speaker 02: That I struggled with, because that's a little bit like if you run your car into my car, [00:15:45] Speaker 02: And I say, you know, and the judge was to say, we're not asking for damage for recompense to having, you know, his car's got dents and all busted up, but he's asking for the fact that he, you know, recompense because he can't use his car now. [00:16:04] Speaker 02: You know, he can't use his car for his work. [00:16:06] Speaker 02: But it seems to me that would certainly be a loss that, quote, unquote, resulted from or arise from you running into my car and the physical damage that that created. [00:16:15] Speaker 02: So that seemed to be what I understood the district court judges sort of textual analysis to the extent there was any. [00:16:23] Speaker 02: Do you think that's correct and why is that not, it seems problematic to me because you can always, rarely, rarely do people come in and say I want a new car. [00:16:32] Speaker 02: They come and say I want money, right? [00:16:33] Speaker 02: So the fact that just because they're asking for economic damages doesn't change where the damages arose from. [00:16:39] Speaker 00: Right. [00:16:42] Speaker 00: Multiple responses to that. [00:16:43] Speaker 00: Thank you for the question. [00:16:45] Speaker 00: Regarding the car analogy, I think one thing that's important to recognize here is that the property that HEC is saying was damaged was the plants. [00:16:56] Speaker 00: SEED has sold the seed. [00:16:58] Speaker 00: The plants essentially are the seed. [00:17:00] Speaker 00: They grew out of the seed. [00:17:02] Speaker 00: So property damage exclusions, property damage and insurance policies in general, [00:17:09] Speaker 00: That refers to damage that happens to other property. [00:17:13] Speaker 00: If Sebus had sold a bag of seeds that maybe had some small rocks in it, and the growers ran their tractor over the field and the rocks damaged their tractor, that tractor suffered property damage. [00:17:24] Speaker 00: In the case of the goat grass, the noxious weed, they sold a bag of seed that had what it was supposed to have, but it was mixed with some noxious weed, and that noxious weed [00:17:33] Speaker 02: Grew up in the fields and hypothetically if it had required remediation if it required multiple years your position is that you know to go back to my car analogy that if you sell a vehicle with bulletproof glass and Somebody shoots your bulletproof glass and it turns out. [00:17:47] Speaker 02: It's not bulletproof and it wrecks your Nice pretty bulletproof car that was a judge that had the car that would not be property damage. [00:17:55] Speaker 02: You're saying that it would only be [00:17:58] Speaker 02: Somebody else's property where does it say that well? [00:18:02] Speaker 00: You actually anticipated exactly the hypothetical I was going to say dents in the car not bulletproof glass But you went exactly where I was going to go and know that's a product defect That would be a product defect claim. [00:18:12] Speaker 00: It would not be property damage It would be your property product didn't work the way it was supposed to work And that's what a unique product though because it grows into something right grows into other properties [00:18:22] Speaker 00: And I appreciate that, Your Honor, because it is a unique product. [00:18:26] Speaker 00: Seeds are unique. [00:18:27] Speaker 00: And that's why this kind of coverage, errors and omissions for seedmans, exists. [00:18:32] Speaker 00: And it's somewhat unique. [00:18:32] Speaker 02: And that's the problem with- When you say this kind of coverage, this kind of coverage is not a seedman's policy. [00:18:37] Speaker 02: I mean, they had a seedman's policy. [00:18:39] Speaker 02: And instead, they got what's a more normal sort of errors and omissions policy. [00:18:44] Speaker 02: And that's part of the problem here. [00:18:45] Speaker 02: If there was a seedman's policy, it wouldn't have had this kind of disclaimer. [00:18:49] Speaker 02: But your client opted for a different kind of policy. [00:18:52] Speaker 00: Well, what we got, Your Honor, was we got a policy that in its grant of coverage, and I'm looking at the record, this is 5ER660, in the insuring agreement, the company shall pay loss and claim expenses in excess of the deductible subject always to the policy's limits of liability. [00:19:08] Speaker 00: And here's the important part, that an insured shall become legally obligated to pay as a result of a claim made against an insured for a wrongful act arising from professional services. [00:19:19] Speaker 00: And in an endorsement to the policy, it defines professional services as services as a seedsman perform for others for a fee. [00:19:26] Speaker 00: So that's what they were insuring. [00:19:30] Speaker 00: If we look at the facts of what Judge Oda found in her findings of fact from the first trial, and I'm reading from 1ER62, lines 3 through 8. [00:19:41] Speaker 00: In this case, the farmers made claims against Sebus for the poor performance of its seeds in 2018 and sought, quote, compensation regarding the non-performance of the Sebus canola in the growing season of 2018. [00:19:54] Speaker 00: Ms. [00:19:55] Speaker 00: Crabtree, HCC's claims handler, testified that she received complaints from the farmers about the seed's low crop yield and ineffective growing advice from Sebus. [00:20:03] Speaker 00: Essentially, the farmers complained that Sebus sold them poor performing [00:20:07] Speaker 00: C5507 and C5522 seeds in 2018 and for the 2018 growing season, not for seedless as poor design of those seeds. [00:20:16] Speaker 01: Let me ask you a question. [00:20:17] Speaker 01: I didn't discern this from the record, or maybe it isn't there, but partially because the trial court looked at the reasonable expectations of the parties. [00:20:26] Speaker 01: What was the motivation behind going from a more direct seedsman's policy to this policy, and what was the premium difference, if you know? [00:20:35] Speaker 00: The premium difference, I don't know. [00:20:36] Speaker 00: I apologize for that, Your Honor. [00:20:38] Speaker 00: I wasn't working for CBAs at the time. [00:20:40] Speaker 00: The motivation was they were simply shopping their coverage. [00:20:42] Speaker 00: They went to their broker who went to a wholesale broker, said, we're looking for new Seedman's E&O. [00:20:48] Speaker 00: Do you know anyone who can place it? [00:20:50] Speaker 00: And the wholesale broker reached out to HCC. [00:20:52] Speaker 00: HCC said, yeah, we can do that. [00:20:54] Speaker 00: And they wrote this coverage. [00:20:55] Speaker 00: And the way that they wrote this coverage was with that endorsement. [00:20:59] Speaker 00: That's why we took the somewhat bold position in our brief that this was now a factual issue, because based on Judge Oda's findings, this is exactly the kind of claim that this coverage was intended to cover. [00:21:11] Speaker 00: Now, before I jump into my next step of the legal analysis, I do want to very quickly address some questions that Your Honor asked of my colleague, Mr. Allison. [00:21:20] Speaker 00: To your question, Judge Smith, Jerry Cass did not visit all the growers. [00:21:24] Speaker 00: The only thing that we have the same from all the growers is that signed claim form. [00:21:28] Speaker 00: He tried to visit. [00:21:30] Speaker 00: Some of them he had phone conversations. [00:21:32] Speaker 00: Some of them he couldn't reach. [00:21:34] Speaker 00: He did get damage amounts, so he got the crop yield loss numbers. [00:21:37] Speaker 00: That was his primary role, frankly. [00:21:39] Speaker 00: But he did not visit all the growers. [00:21:40] Speaker 02: Let me ask a follow-up to that, which is, as I understood these claims, while the forms were characterized as the downstream [00:21:50] Speaker 02: you know crop loss yield etc. [00:21:54] Speaker 02: I mean what is your position on does that If if you I know you have trouble doing it because I don't think you agree with this position but if if you if a court was to conclude that the loss yield was a result of property damage the kind of property damage covered by the What what other what other loss is there in the record other than something that would tie back to the [00:22:19] Speaker 02: To the property loss and again I'm not asking you to concede that that was actually a property loss within the meaning of the right But if if if that was the position, I'm trying it kind of goes to judge Smith's question to your opposing counsel earlier What other kinds of losses are there in in this record? [00:22:38] Speaker 00: Sure Well one thing there is not is any grower complaining that they lost the use of their field or had to remediate their field That's not here [00:22:46] Speaker 00: But going to your question about reputational, there's no there's no allegation of that. [00:22:51] Speaker 00: It was diminished yield and diminished quality. [00:22:54] Speaker 00: So the seeds sold for less money because they were lower quality and there were fewer of them and different growers had different mixes of fewer of them when they would when they would harvest. [00:23:04] Speaker 02: they would get fewer seeds and then they were like smaller or like didn't work or something like that. [00:23:10] Speaker 00: Correct, Your Honor. [00:23:10] Speaker 00: Some growers got fewer bushels. [00:23:12] Speaker 00: Some growers got seeds that were of inferior quality, so they sold for a lower price. [00:23:15] Speaker 02: I'm just curious, does that mean like that you don't get as much canola oil out of a seed or something like that? [00:23:20] Speaker 02: Is that what lower quality means? [00:23:23] Speaker 00: Yes, and they press this into different grades, and what they can sell the seed for depends on what grade it can be pressed into. [00:23:29] Speaker 04: Can I just shift to the sublimit aspect? [00:23:33] Speaker 04: Just looking at the actual language of the property damage sublimit refers to claims that are, in quotes, based upon or arising out of property damage. [00:23:43] Speaker 04: In your brief though, you argued that the sublimit is, in quotes, only relevant to whatever portion of the liability was solely attributable to property damage. [00:23:53] Speaker 04: How does your claim in the brief square with the language of the policy? [00:23:58] Speaker 00: Thank you, Your Honor. [00:23:59] Speaker 00: That's where I was hoping to go. [00:24:00] Speaker 00: Excellent. [00:24:03] Speaker 00: So again, I already read for you the granting provision, the trigger of the policy. [00:24:08] Speaker 00: There's no dispute that that was triggered. [00:24:10] Speaker 00: HCC has never disputed that coverage was triggered here. [00:24:13] Speaker 00: Now let's do a quick tour through the policy and let's start with the exclusion that used to exist. [00:24:19] Speaker 00: This is on 5ER673. [00:24:21] Speaker 00: The exclusion says, [00:24:24] Speaker 00: The policy does not apply to any claim, claim expenses, notification expenses or loss. [00:24:29] Speaker 00: Subsection I, four, one, bodily injury or two, property damage. [00:24:34] Speaker 00: It then goes on to say, however, this exclusion shall not apply to a claim based upon or arising out of the performance or failure to perform professional services, which is what we have here, as long as the bodily injury or property damage [00:24:48] Speaker 00: was not directly caused by an insured. [00:24:51] Speaker 00: There has never been any allegation or fact to support the idea that Sebus directly caused this injury. [00:24:58] Speaker 00: Sebus didn't go out there and spray any of these chemicals. [00:25:01] Speaker 00: Sebus didn't step on any plants. [00:25:03] Speaker 00: They didn't harm any plants. [00:25:05] Speaker 00: So if this endorsement weren't there, this exclusion would plainly not apply. [00:25:11] Speaker 00: Plainly. [00:25:13] Speaker 00: No allegation that Sebus directly injured anything. [00:25:17] Speaker 00: Now they take this endorsement, which, by the way, there's something in HTC's brief that I agree with. [00:25:25] Speaker 00: They admit in their opening brief that this endorsement is not an exclusion. [00:25:31] Speaker 00: They write, quote, the sublimit is not an exclusion. [00:25:34] Speaker 00: Indeed, the provision deletes an exclusion from the policy form. [00:25:37] Speaker 00: Instead, it affirmatively grants coverage for claims arising from property damage. [00:25:42] Speaker 00: So they're trying to use it as an exclusion, but they say it's not an exclusion. [00:25:47] Speaker 00: And then they turn around and they say, well, yeah, and it's an exclusion, and it's clear and conspicuous as exclusions must be under California law. [00:25:53] Speaker 00: Well, how is it clear and conspicuous if even HCC itself is saying this is not an exclusion? [00:25:59] Speaker 00: It doesn't make any sense, Your Honor, and to your earlier question, Judge Van Dyke, it would allow this endorsement, which was intended to add $100,000 of property damage coverage that would not otherwise be there, it would allow this endorsement to eviscerate this coverage because, as Your Honor anticipated, almost every seedsman's claim is going to involve a plant that looks a little funny or a plant that doesn't grow the way it was expected to. [00:26:23] Speaker 00: It's the nature of the business. [00:26:24] Speaker 00: And that reminds me to your question. [00:26:27] Speaker 02: You keep seeing a Seedman's claim, but that is the whole problem here, right? [00:26:30] Speaker 02: Like a normal Seedman's policy like you had the year before, it isn't written this way. [00:26:34] Speaker 02: I mean, that's one of the challenges of this case. [00:26:40] Speaker 02: Your story is that you are attempting to sort of create this [00:26:45] Speaker 02: like Jerry Riggs Seidman's policy from an EEO policy. [00:26:50] Speaker 02: That's your story. [00:26:51] Speaker 02: Their policy, their story is we are giving you an EEO policy and we, and I think they're saying that the property damage, 100,000 is not an exclusion, but it clearly, the language is attempting to exclude something, right? [00:27:04] Speaker 02: It's attempting to exclude something from the EEO policy, property damage, and then they add back in and give you a lower limit on that. [00:27:12] Speaker 02: Is there interpretation? [00:27:14] Speaker 02: I struggle whenever you say it's a Siegeman's claim, because it's just not a traditional Siegeman's policy. [00:27:19] Speaker 00: Well, let's call it a professional negligence claim, or let's call it an E&O claim. [00:27:22] Speaker 00: It's the same thing. [00:27:24] Speaker 00: The bottom line is Sebus was negligent. [00:27:25] Speaker 00: It negligently selected and sold seeds that didn't perform. [00:27:29] Speaker 02: It's very normal to have EO type policies where typically what you're doing is you're trying to insure for professional negligence, and they won't cover [00:27:38] Speaker 02: It's not abnormal to have those not covered. [00:27:42] Speaker 02: Like if I was as a lawyer or you as a lawyer had a professional negligence policy, it might very much limit your property damage exposure because that's not the main thing they're actually insuring for. [00:27:58] Speaker 02: They're insuring for your professional negligence, right? [00:28:00] Speaker 02: Like you're causing somebody to go bankrupt or something like that. [00:28:04] Speaker 02: And if you hit somebody with your car, they want to make sure they're not subject to $2 million. [00:28:08] Speaker 02: They're only subject to $100,000. [00:28:10] Speaker 00: Okay, so what your honor's question goes to, I think, is essentially what's the wrongful act, you know, in order to trigger coverage here. [00:28:17] Speaker 00: And I first want to emphasize that there's not been a dispute. [00:28:19] Speaker 00: We didn't brief. [00:28:20] Speaker 00: There wasn't argument at the lower, you know, on what the wrongful act was. [00:28:24] Speaker 00: But the wrongful act was SEBA selecting and selling these seeds. [00:28:27] Speaker 00: SEBA has multiple varieties of seeds. [00:28:30] Speaker 00: These are the ones it chose to sell, and it turned out that under the environmental conditions that year, these seeds didn't perform the way they were supposed to. [00:28:36] Speaker 00: That's a negligent provision of their professional services as a seedsman. [00:28:41] Speaker 04: Can I ask you this? [00:28:42] Speaker 04: I just want to shift because you don't have much time left to the second part of this issue. [00:28:47] Speaker 04: That's the attorney fees and the bad faith claim. [00:28:51] Speaker 04: If, if, arguing that we were to conclude that the property damage sublimit does apply to some degree, any degree, [00:29:00] Speaker 04: Would you agree that in that circumstance that ACC could not have acted in quotes unreasonably and therefore in bad faith? [00:29:08] Speaker 00: No, Your Honor, and the reason for that is because they had five other defenses that they didn't even bring up on this appeal that were unreasonable, that would have, if they were right, or if those defenses were reasonable, eviscerated even that hundred thousand coverage. [00:29:20] Speaker 02: So I understand your answer to that, because I thought about it. [00:29:22] Speaker 02: But what you're basically saying is that your interpretation of [00:29:27] Speaker 02: that you can have liability for this kind of claim. [00:29:30] Speaker 02: The insurer can only bring all claims that are, they can't take a kitchen sink approach. [00:29:36] Speaker 02: They can't do what almost every lawyer does. [00:29:38] Speaker 02: We see it all the time. [00:29:39] Speaker 02: We're like, the first two claims are actually sort of, the first two issues are sort of interesting and are close. [00:29:47] Speaker 02: The rest of them are the kitchen sink, right? [00:29:49] Speaker 02: And you're saying that they would be liable under [00:29:53] Speaker 02: What I think is already an extension of, I forget the name of the case, the rule, but the brandt fees, if you extended the brandt fees to this concept, not only are you saying it should be extended, but like if you have two meritorious claims or two, I mean, yeah, I think under your argument, even if you had two meritorious claims, so they won on two things, but they lost on their other five, [00:30:18] Speaker 02: or other four or other one, that you could still get brand fees. [00:30:23] Speaker 02: That seems a real extension. [00:30:25] Speaker 00: Okay, so I want to answer your question. [00:30:27] Speaker 00: I've got a red light flashing at me here. [00:30:28] Speaker 04: There's a prep door also. [00:30:31] Speaker 04: Don't worry about that, though. [00:30:33] Speaker 00: So I first of all want to be clear. [00:30:35] Speaker 00: They have tried to frame this as the act of bad faith was bringing the lawsuit. [00:30:39] Speaker 00: It wasn't. [00:30:41] Speaker 00: Insurers are allowed to file lawsuits to resolve coverage disputes. [00:30:45] Speaker 00: Blue Ridge established as a procedure for doing that when they had an opportunity to settle the case to avoid being trapped under the Johansson of being squeezed between bad faith refusal to settle and paying coverage that wasn't owed. [00:30:56] Speaker 00: But they were allowed to sue. [00:30:58] Speaker 00: What they weren't allowed to do was sue based on unreasonable positions, and they were not allowed to conduct bad faith in the course of their claims handling. [00:31:06] Speaker 00: And Judge Oda, in the phase two trial, found at least six different ways, all of them before HCC paid a dime, [00:31:14] Speaker 00: that HCC committed bad faith. [00:31:17] Speaker 00: You know, number one, HCC failed to fairly and properly investigate. [00:31:20] Speaker 00: They're not allowed to do that, no matter whether they pay or whether they later sue, because that failure to properly investigate caused CBIS to have to retain counsel and fight for the coverage that it was owed. [00:31:32] Speaker 02: Number two, HCC unreasonably... So I'm very familiar, I think, I'm sure my colleagues are very familiar with that, is your, it's a challenge because [00:31:40] Speaker 02: If they had not brought suit, if they'd done all those things that the district court judge here pointed to and said, it's not the bringing of the suit, it's the bad faith, but if they'd done all that and never brought a suit, we wouldn't be here. [00:31:52] Speaker 02: We wouldn't be here, right? [00:31:54] Speaker 02: So it's hard for me to not see how those things are really just another way of saying they brought a suit that was not investigated well, that was in bad faith. [00:32:04] Speaker 00: So the key distinction here is we wouldn't be here, but the reason we wouldn't be here is because the damages would not have arisen. [00:32:11] Speaker 00: The tort would have still been committed, and I suppose if Sebus wanted to be pedantic, it could have sued for bad faith, and they probably would have said, oh, you don't have damages. [00:32:21] Speaker 00: was the bad faith in the claims handling in the basically bullying SEBIS. [00:32:25] Speaker 00: I mean this was a case that was exactly the kind of thing for which SEBIS brought coverage and they come out of the gate with six different reasons why it's not covered and they persist in those throughout and then they say take half of the coverage, take a million bucks and be done or take two million and we can sue you to get it back. [00:32:43] Speaker 00: And then they sued to get it back. [00:32:44] Speaker 00: From the get-go, they were using all these defenses to try to pressure Sebus into taking a lot less money than it should have been owed. [00:32:54] Speaker 00: I get the joke as somebody who represents a lot of policyholders, but that's not what the law says insurance companies can do. [00:33:04] Speaker 00: tough dealing is not what insurance companies do. [00:33:06] Speaker 02: If they're right or not, if it turned out they were right about the property limit, then you got a great offer, which was to get a million dollars instead of $100,000, and you could have gotten a boon on that. [00:33:17] Speaker 02: And if you're right, then they should have paid the $2 million and walked away. [00:33:22] Speaker 02: But what we've added to this in the district court ruling is that now if they're wrong, it seems like [00:33:33] Speaker 02: Figuring out the distance between being wrong versus being unreasonable is a very thin line, it seems like, under your position. [00:33:43] Speaker 00: And I again would direct the court, I would direct Your Honors, to Judge Oda's findings, because she goes through in detail for pages, the testimony, the documents, the things that HCC ignored that it shouldn't have, the faulty analysis. [00:33:56] Speaker 02: Yeah, I read those findings is that basically insurance companies need to [00:34:00] Speaker 02: do a put a lot more stuff write a lot more stuff down whenever they're investigating claim it seemed to me you know they have to make these decisions and I don't I don't love insurance companies either but I could it's just like it seems like it would be adding even more and more red tape administrative hassle if you were ever going to bring one of these claims in which case insurance companies just would not be able to bring them it seems like because of the risk would be too high of this kind of [00:34:24] Speaker 00: Well, I mean, insurance companies do write a lot of things down. [00:34:27] Speaker 00: They maintain a claims file that's the first thing you get in discovery in every insurance case. [00:34:31] Speaker 00: And it's for exactly this reason. [00:34:33] Speaker 00: They document all of it. [00:34:34] Speaker 00: The emails are in there. [00:34:35] Speaker 00: The notes of the adjuster are in there. [00:34:38] Speaker 00: If they got outside opinions, as they did in this case, those would be in there. [00:34:41] Speaker 00: But then they'd be privileged until they invoke advice of counsel, et cetera. [00:34:45] Speaker 04: We could talk about this for a long time. [00:34:48] Speaker 04: I just have one question. [00:34:51] Speaker 01: Can you cite us to any California case that has authorized recovery of attorney fees in this circumstance? [00:34:58] Speaker 00: In a similar circumstance, I'll point, Your Honor, to the case of Mustachio. [00:35:02] Speaker 00: It's Mustachio versus, I want to say, Ohio. [00:35:08] Speaker 00: I don't want to misspeak on this. [00:35:11] Speaker 00: The citation is 44 CalAP 3rd 358. [00:35:15] Speaker 00: Mustachio predates Brandt, but what's important, and that's why we didn't cite it in our brief, but what's important about Mustachio is that Brandt favorably cites and in fact approves of Mustachio. [00:35:26] Speaker 00: And so I'm going to read [00:35:28] Speaker 01: Can I stop you real quick? [00:35:30] Speaker 01: That's before this whole practice of recoupment came into being, correct? [00:35:34] Speaker 00: Well, Brandt essentially resolved a split of authority between Mustachio and another case that was called Ostero. [00:35:41] Speaker 00: So Mustachio, in some part, it wasn't the facts that led to the Brandt decision, but it was the legal decision that led to it. [00:35:47] Speaker 04: I know you would read it well, but why don't you let us read Mustachio? [00:35:51] Speaker 04: And any other questions, my colleague? [00:35:53] Speaker 04: I know you'd like to say more, but [00:35:54] Speaker 04: Unfortunately, this is a court of appeals and we can't go on forever. [00:35:58] Speaker 00: I've got six minutes and four bonus seconds as it was so I appreciate that your honor Thank you very much. [00:36:03] Speaker 04: Thank you counsel you have some Rebuttal time since you were underwater. [00:36:07] Speaker 04: We're gonna give you two more minutes to Respond thank your honor. [00:36:11] Speaker 03: I'll try not to stand on the trapdoor when I do that please [00:36:16] Speaker 03: So I'm going to try to make two primary points, first on the property damage limit. [00:36:22] Speaker 03: The important point here, and this goes to Judge Van Dyke's question, which is that property damage is, in this context, in this ENO policy, the reason it's structured the way it is, is property damage is very typically covered under a CGL policy. [00:36:38] Speaker 03: in this policy, and this is in the record and it's in the policy, has a requirement that the insured have a CGL policy for exactly this reason, because property damages typically covered under CGL, not a Seedsman ZNO, and here there was some additional coverage given through the endorsement. [00:36:59] Speaker 03: I want to go to the last point that my opposing counsel talked about, and this is really important and fundamental. [00:37:07] Speaker 03: Brandt and Blue Ridge addressed this point. [00:37:12] Speaker 03: That's, excuse me, Blue Ridge and Buss addressed this point and then supplemented by Brandt. [00:37:17] Speaker 03: And these cases all work together. [00:37:18] Speaker 03: And where do they, when you put them all together, where do you end up with? [00:37:22] Speaker 03: You end up with the California Supreme Court saying insurers, if you have a doubt, pay. [00:37:30] Speaker 03: Pay defense costs or pay settlement costs and then bring your [00:37:36] Speaker 03: declaratory relief action on disputed coverage positions and determine if you were right or wrong. [00:37:46] Speaker 03: Then you supplement that, and that's why Brandt says to obtain benefits, because think about it this way. [00:37:52] Speaker 03: The only time there could be a situation to retain benefits is if you're bringing a bus action or a Blue Ridge action. [00:38:00] Speaker 03: That's the only time you would have it, and those two procedures were expressly, [00:38:06] Speaker 03: laid out and encouraged by the California Supreme Court. [00:38:09] Speaker 03: And then the last point I'll make is you have to come on top of all of that with California's litigation privilege in Civil Code Section 47, which is absolute and has one exception, one, Melissa's prosecution. [00:38:23] Speaker 03: If the district court here could not have really been any more clear if you look at, frankly, paragraph page two of the findings, and it says, [00:38:34] Speaker 03: that Sebas claimed that we maintained the coverage positions and brought the declaratory relief action. [00:38:39] Speaker 02: The case that was just mentioned at the end, are you familiar with that? [00:38:47] Speaker 03: It was not cited in any of the briefings, so I would [00:38:51] Speaker 03: I would, all I would point out is I think it's very important that it was before not only Brandt, but before Buss and Blue Ridge. [00:39:00] Speaker 03: You read these cases together. [00:39:03] Speaker 03: And so I'd be happy to address Mustachio if it's important in a letter to the court, but I had not read it in preparation for this because it was not cited. [00:39:11] Speaker 04: Other questions by my colleagues? [00:39:13] Speaker 04: Thanks to both counsel for your learned argument. [00:39:15] Speaker 04: We appreciate it. [00:39:15] Speaker 04: This is an interesting and challenging California insurance law case. [00:39:20] Speaker 04: Thank you. [00:39:21] Speaker 04: The case just argued is submitted. [00:39:23] Speaker 03: Thank you, honors.