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August 12, 1996


The opinion of the court was delivered by: WARE

 The Court has before it the cross-motions of the parties for summary judgment. Based upon all pleadings filed to date, as well as on the oral argument of counsel, the Court DENIES Plaintiff's motion and GRANTS Defendant's motion.


 Plaintiffs Eyvind and Joan Earle ("the Earles") filed this action in state court, seeking compensatory and punitive damages for an alleged tortious breach of a liability insurance policy. The Earles claim that Defendant State Farm Fire & Casualty Company ("State Farm") wrongfully refused to pay The Earles' defense costs in the underlying state court litigation. Defendant removed the action to federal court. This case arises out of a commercial lawsuit against the Earles in the Monterey Superior Court which involved several claims, including one for defamation. The Earles first tendered the defense to Defendant in August 1994, after the jury rendered a verdict against the Earles in July 1994.

 In support of their cross-motions, the parties have filed an "Agreed Statement of Facts" in which they state that they seek resolution of the following issue: whether the Earles are entitled to reimbursement of post-tender fees and costs incurred by them in defending and settling a lawsuit in Monterey County Superior Court. The parties have stipulated to the facts set forth below.

 The Earles reside in Carmel, Monterey County, California. Eyvind Earle is a prominent artist, now 80 years old, whose paintings and other works are bought and sold throughout the world. State Farm is a corporation organized and existing under the laws of the State of Illinois and is engaged in the business of insurance in California. Defendant issued a Personal Liability Umbrella Policy (the "policy") to the Earles effective March 15, 1992 to March 15, 1993.

 The State Farm policy states that State Farm would provide the Earles with a defense to claims or suits covered by the policy. The policy also delineated State Farm's indemnity obligation if the Earles became legally obligated to pay damages for a "loss," defined in the policy as "an accident that results in personal injury or property damage during the policy period." The parties agree that as relevant to this case, "personal injury" is defined to include "libel, slander, defamation of character or invasion of rights of privacy."

 Immediately after the jury verdicts were announced, the trial court informed the parties that it wished to supervise settlement discussions. At about the same time, the Earles retained new attorneys to assist them in evaluating their legal options. On or about August 11, 1994, the Earles, acting through their new attorneys, tendered the Bane lawsuit to State Farm and asked for reimbursement of pre-tender defense fees and costs, as well as payment of that portion of the judgment relating to the defamation claim. This was the first notice to State Farm of the Bane lawsuit.

 Settlement discussions began under the trial court's supervision on or about August 15, 1994 and continued through mid-November 1994. Judgment on the jury verdicts was entered on September 22, 1994. The judgment included an award of $ 700,000 to Bane on the defamation claim against the Earles.

 While settlement discussions were proceeding, the Earles prepared a motion for judgment notwithstanding the verdict and a motion for a new trial. These motions were filed on October 24, 1995. The Earles entered into a comprehensive settlement agreement in Bane on or about November 18, 1994. Under the terms of the settlement, the Earles agreed to pay the Bane plaintiffs $ 2,250,000 in cash and to deliver to them 1540 Earle graphics worth (on average) approximately $ 3,000 wholesale per graphic print.

 State Farm acknowledged receipt of the tender on or about August 15, 1994 and stated that it would proceed with its coverage review. By letters dated August 15 and 18, 1994, State Farm advised the Earles that "we are neither accepting nor rejecting your tender of defense at this time." During the review period, which lasted until February 1995, the Earles provided State Farm with information relevant to their claim as requested, and kept State Farm apprised of the progress of the settlement discussions as they occurred.

 On October 7, 1994, State Farm conditionally offered to contribute $ 517,000 to the settlement of the Bane action, representing 50% of the total verdict on the defamation claim (including interest accrued and costs). The Earles accepted this offer, with modifications, on November 9, 1994. *fn2" State Farm tendered its check to the Earles on or about November 17, 1994. This payment was accompanied by a letter from counsel for State Farm dated November 17, 1994, which stated:

The payment and acceptance of this sum will resolve any dispute between Mr. Earle and State Farm regarding the amount which State Farm may owe to Mr. Earle pursuant to an obligation imposed by an insurance policy issued by State Farm Fire & Casualty Company to indemnify him for damages for which he is legally liable. All rights and issues regarding the existence and extent of any obligation of State Farm to pay or reimburse any insured for fees and costs incurred in the defense of the claims and suit are preserved by all parties and are unaffected by this payment and the related agreement.

 Agreed Statement, Exh. F.

 State Farm advised the Earles by letter of February 1, 1995 that it concluded it was not obligated to pay any of the fees and costs the Earles incurred in defense of the Bane case and therefore it denied the Earles' claim for pre- and post-tender defense expenses. *fn3" The Earles claimed entitlement to post-tender fees and costs incurred between August 11, 1994 and November 1994 in the approximate amount of $ 260,000. State Farm has not paid any of these post-tender defense fees and costs. The parties have agreed to a stipulated amount of damages in the event the final judgment in this action is in favor of the Earles.

 Based on the claims asserted in the Bane complaint, State Farm believes it would most likely have accepted the Earles' tender of defense pursuant to a reservation of rights under the policy had the tender been made at the outset of the litigation and does not contend in this proceeding that it would have denied the tender.

 The policy at issue provides as follows in the coverages section:

1. Coverage L - Personal Liability. If you are legally obligated to pay damages for a loss we will pay your net loss ...

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