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October 7, 2005.

ST. PAUL FIRE & MARINE, Defendant.

The opinion of the court was delivered by: SUSAN ILLSTON, District Judge

On October 7, 2005, the Court heard oral argument on plaintiff's motion for partial summary judgment. For the reasons set forth below, the Court hereby GRANTS in part and DENIES in part plaintiff's motion, and DENIES defendant's motion to strike the Supplemental Declaration of Shelly Knox.


  Plaintiff Atmel Corporation("Atmel") is a company that manufactures computer chips. Atmel obtained general liability and errors and omissions insurance from defendant St. Paul Fire & Marine Insurance Company ("St. Paul") beginning January 1, 2002. This lawsuit arises out of St. Paul's refusal to defend Atmel in a now-settled lawsuit brought by one of Atmel's customers, Seagate Corporation. In that lawsuit, which the parties refer to as the "Seagate Action," Seagate alleged that Atmel sold it defective computer chips and that Seagate had notified Atmel of the problems in the fall of 2001. St. Paul denied a defense in the Seagate Action and unilaterally rescinded Atmel's insurance policy on the ground that Atmel knew about the Seagate problems before the policy was issued and failed to disclose them in its applications for insurance.

  Although the parties dispute virtually all of the facts surrounding St. Paul's rescission of the insurance policy, it is undisputed that Atmel did not identify any problems with Seagate or the allegedly defective computer chips on its applications for insurance. The errors and omissions application asked: "Does anyone in your organization have knowledge or information of any act, error or omission which might reasonably be expected to result in an Errors & Omissions claim?" Runkel Decl., Ex. E. The general liability application similarly asked Atmel to identify "all claims or occurrences that may give rise to claims for the prior 5 years." Id. at Ex. F.

  After it was sued in July of 2002, Atmel tendered the Seagate Action to St. Paul and to its previous insurer, Royal Indemnity Company, which had provided Atmel with insurance through December 31, 2001.*fn1 Atmel and St. Paul characterize the events that followed the tender in markedly different ways. Atmel contends that after St. Paul acknowledged notice of the lawsuit on August 20, 2002, it began a "fishing expedition" by unreasonably requesting more and more information while refusing to defend in the meantime. St. Paul, in contrast, claims that Atmel failed to cooperate with its investigation into the claim, and that Atmel was not forthcoming about the extent or nature of its knowledge of the problems with Seagate. It is undisputed that Atmel provided St. Paul with two boxes of documents regarding the Seagate Action in October 2003. The parties exchanged a series of letters between February and July 2004 regarding whether St. Paul had a duty to defend Atmel in the Seagate Action, and relatedly whether St. Paul was entitled to rescind the policy because Atmel should have disclosed any issues related to Seagate on its insurance applications.

  On September 27, 2004, Atmel filed the instant lawsuit seeking damages and declaratory relief against St. Paul for breach of contract and breach of the implied covenant of good faith and fair dealing. St. Paul counterclaimed, alleging rescission, breach of contract, intentional misrepresentation/concealment, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing. St. Paul has also raised rescission as one of several affirmative defenses.

  On November 2, 2004, after this lawsuit was filed, St. Paul tendered rescission of the policy and offered Atmel a check for the premiums paid to date, stating "St. Paul hereby rescinds the above-referenced policies in their entirety, rendering them void from inception." Cusack Decl., Ex. T. Atmel rejected the tender of rescission on November 5, 2004, and returned the proffered check. LEGAL STANDARD

  Summary adjudication is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).

  In a motion for summary judgment, "[if] the moving party for summary judgment meets its initial burden of identifying for the court those portions of the materials on file that it believes demonstrate the absence of any genuine issues of material fact, the burden of production then shifts so that the non-moving party must set forth, by affidavit or as otherwise provided in Rule 56, specific facts showing that there is a genuine issue for trial." See T.W. Elec. Service, Inc., v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 317 (1986). In judging evidence at the summary judgment stage, the Court does not make credibility determinations or weigh conflicting evidence, and draws all inferences in the light most favorable to the non-moving party. See T.W. Electric, 809 F.2d at 630-31 (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348 (1986)); Ting v. United States, 927 F.2d 1504, 1509 (9th Cir. 1991). The evidence presented by the parties must be admissible. Fed.R.Civ.P. 56(e). Conclusory, speculative testimony in affidavits and moving papers is insufficient to raise genuine issues of fact and defeat summary judgment. Thornhill Publ'g Co., Inc. v. GTE Corp., 594 F.2d 730, 738 (9th Cir. 1979).


  Atmel seeks an order granting partial summary judgment on the following three issues: (1) that St. Paul breached its duty to defend Atmel in the Seagate action, notwithstanding St. Paul's allegations of rescission, and is liable for Atmel's unreimbursed defense costs unless and until it is adjudicated that the policy is rescinded; (2) that Civil Code § 2860, which limits the rates that insurers pay independent counsel when an insurer's reservation of rights creates a conflict of interest, has no relevance to the measure of Atmel's damages for St. Paul's breach of its duty to defend; and (3) that the Fraud and Misrepresentation clause contained in the policy requires St. Paul to prove intentional fraud in order to rescind (and for this reason St. Paul's cause of action for negligent misrepresentation should also be dismissed).

  1. Duty to Defend/Unilateral Rescission

  Atmel contends it is entitled to summary judgment on the issue of whether St. Paul violated its duty to defend Atmel in the Seagate action. Atmel argues that the allegations of the Seagate complaint, the terms of the St. Paul policy, and other extrinsic evidence, created the potential for covered liability. Therefore, Atmel argues, St. Paul was obligated to assume the defense, under a reservation of rights if it wished, unless and until it could conclusively establish its right to rescind. Atmel contends that St. Paul was not entitled to unilaterally rescind the policy and instead should have sought rescission judicially.

  In response, St. Paul contends that it was entitled to unilaterally rescind the policy due to Atmel's failure to disclose the problems with Seagate in its application for insurance, and thus the insurance contract was retroactively null and void. St. Paul argues that the cases relied upon by Atmel which discuss an insurer's duty to defend are distinguishable because they all presume the existence of a valid contract. Here, St. Paul contends, there was no valid contract because St. Paul rescinded the policy. Thus, ...

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