of public policy, California law prohibits insurance coverage for punitive damage awards.
Fibreboard argues that the laws of West Virginia and Texas, where the punitive damages were awarded, govern this case, and that in those states, insurance of the punitive damages at issue is permitted. In the alternative Fibreboard argues that even if California law is applied, the damages at issue do not constitute "punitive damages" as defined in California law, and that therefore insurance is not prohibited. Fibreboard argues that California's policy is designed to punish and deter specific behavior, and that the behavior here at issue does not fall into that category.
The motion came on for hearing on Monday, October 22, 1990. After careful consideration of the parties' written and oral arguments, it appears to the satisfaction of the court therefrom that the plaintiff's motion should be DENIED.
Fibreboard is a Delaware corporation with its principal place of business in California. From 1928 to 1971 Fibreboard, at its California facilities, manufactured products containing asbestos, which were sold in California and in other states.
In 1957, Fibreboard purchased a liability insurance policy from Continental, an Illinois corporation, for coverage from May 1957 to March 1959. The parties entered into this insurance contract in California, and premiums were paid in California. The policy provides that Continental will pay "all sums which [Fibreboard] shall become obligated to pay by reason or in consequence of legal liability for damage however or wherever created or alleged to have arisen or to have been created, because of bodily injuries . . . suffered by any person." The policy does not expressly exclude coverage for punitive damages, and it has no choice of laws provision.
In re Asbestos is a consolidated action pending in the West Virginia Circuit Court, Kanawah County, No. 84-C-3321, in which 300 plaintiffs have sued Fibreboard for asbestos-related bodily injury claims. In the first phase, the jury found Fibreboard liable for punitive damages to any plaintiff who subsequently is awarded compensatory damages.
In April of 1990, a Texas jury found Fibreboard liable for punitive damages in Cimino, et al. v. Raymark Indus., Inc., et al., a class action with over 2,300 plaintiffs in the United States District Court for the Eastern District of Texas. Civil Action No. B-85-0546.
Continental now seeks a declaration that it is not required to reimburse Fibreboard for the punitive damages awarded in the West Virginia and Texas actions.
The legal standard in a summary judgement motion is a rule of procedure, not substance, and so under Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78-79, 82 L. Ed. 1188, 58 S. Ct. 817 (1938) is governed by federal law in a diversity action. In Federal district court, pursuant to Rule 56(c), to prevail in a motion for summary judgement, the moving party must establish: (1) that there is "no genuine issue of material fact, and (2) that the moving party is entitled to judgment as a matter of law." British Airways Board v. Boeing Co., 585 F.2d 946, 951 (9th Cir. 1978); Fed.R.Civ.P. 56(c). The moving party must show that no reasonable trier of fact could find other than for the moving party. Schwarzer, Summary Judgment under the Federal Rules, 99 F.R.D. 465, 487-88 (1984). All reasonable inferences from the evidence are to be drawn in favor of the non-moving party. Anderson v. Liberty Lobby, 477 U.S. 242, 106 S. Ct. 2505, 2513, 91 L. Ed. 2d 202 (1986). However, "the mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for [the opposing party]." Id. 106 S. Ct. at 2512.
In this action there is no dispute over the facts described above. This matter may properly be resolved on summary judgement.
Continental urges the application of California law to this case, while Fibreboard argues that we should apply the laws of West Virginia and Texas. The threshold issue is therefore that of the proper choice of laws.
In an action brought under diversity jurisdiction, a federal district court applies the choice of law analysis of the state in which it sits. Liew v. Official Receiver & Liquidator, 685 F.2d 1192, 1195 (9th Cir. 1982), citing, Klaxon Co. v. Stentor Elec., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). We are to decide state law issues as would the Supreme Court of our forum state. C.I.R. v. Estate of Bosch, 387 U.S. 456, 464-65, 18 L. Ed. 2d 886, 87 S. Ct. 1776, 1782 (1967).
The California Supreme Court resolves conflict of laws questions through a "governmental interest" analysis, Reich v. Purcell, 67 Cal. 2d 551, 554, 63 Cal. Rptr. 31, 34, 432 P.2d 727 (1967); Hurtado v. Superior Court, 11 Cal. 3d 574, 579, 114 Cal. Rptr. 106, 109, 522 P.2d 666 (1974), which requires the court "to find the proper law to apply based upon the interests of the litigants and the involved states." Offshore Rental Co. v. Continental Oil Co., 22 Cal. 3d 157, 161, 148 Cal. Rptr. 867, 583 P.2d 721 (1978).
However, there is no conflict if the same outcome would be reached under the laws of each of the states involved. Hurtado, at 580, 114 Cal. Rptr. at 109, 522 P.2d 666. Therefore, the first question is whether the outcome of this summary judgement motion differs if California law is applied, as opposed to the laws of West Virginia and Texas.
Insurability of Punitive Damages in California
City Products Corp. v. Globe Indemnity Co., 88 Cal. App. 3d 31, 151 Cal. Rptr. 494 (1979) was the first statement of California's public policy bar against the insurance of punitive damages. The basic rationale for the City Products rule was that insurance undermines the punitive and deterrent purposes of punitive damages. Punitive damages are designed to punish especially blameworthy tortfeasors. "The policy of this state with respect to punitive damages would be frustrated by permitting the party against whom they are awarded to pass on the liability to an insurance carrier." Id. at 42. The California Supreme Court adopted the City Products rule in Peterson v. Superior Court, 31 Cal. 3d 147, 181 Cal. Rptr. 784, 642 P.2d 1305 (1982).
The City Products court recognized a sharp split among jurisdictions as to the insurability of punitive damages. The Court noted that the jurisdictions which prohibit insurance for punitive damages are those in which punitive damages are allowed for only exceptionally egregious conduct, defined as "fraud, oppression or malice." City Products, 88 Cal.App.3d at 41. In such jurisdictions, punitive damages have as their only purpose punishment and deterrence. This purpose would be undermined by insurance. Id.
Jurisdictions which allow punitive damage insurance have a much lower threshold for awarding punitive damages, allowing them for "gross negligence or reckless or wanton conduct." Id. The City Products court noted that courts in such jurisdictions have recognized the unfairness to a person "who might well be ruined financially by a judgment for punitive damages as the result of conduct of no more flagrancy than an act of 'gross negligence,' a momentary 'reckless' act, or conduct 'contrary to societal interests.'" Id. at 41, quoting, Harrell v. Travelers Indem. Co., 279 Ore. 199, 567 P.2d 1013, 1021 (1977).
The City Products court held that California has the higher threshold for awarding punitive damages and should therefore disallow punitive damage insurance. Id. The court stated:
Such coverage is valid in jurisdictions where punitive damages are allowed in respect of gross negligence or reckless or wanton conduct. On the other hand, the authorities in jurisdictions where punitive damages are limited to cases involving fraud, oppression or malice have generally invalidated insurance coverage for punitive damages on public policy grounds.
It is clear that California falls into the latter category . . . It is also clear the primary purposes of punitive damages awards in this state are those . . . "for punishment and deterrence." Id. at 41 (citations omitted).