The opinion of the court was delivered by: Honorable Larry Alanburns United States District Judge
ARBITRATION RULING ORDER AFFIRMING
This case involves an insurance coverage dispute between Illinois Union Insurance Company ("IU") and North County Ob-Gyn ("NCOG"). The dispute raises the question whether legal fees paid by IU on NCOG's behalf erode the liability limit of a policy that IU issued to NCOG. An arbitration panel has already ruled in NCOG's favor. Now before the Court is IU's motion to vacate the arbitration panel's ruling. For the reasons given below, the motion is DENIED.
NCOG purchased a "Business Management and Indemnity Policy" from IU. That policy contains an "Employment Practices Coverage Section," under which NCOG is insured against claims that arise in the context of the workplace: hostile work environment, employment-related discrimination, retaliation, and the like. The policy entitles NCOG to $1 million in coverage for these claims.
On September 27, 2005,NCOG was sued by its former chief financial officer, Seth Bulow, for wrongful termination, breach of contract, breach of covenant of good faith and fair dealing, intentional infliction of emotional distress, and negligent infliction of emotional distress. On October 6, 2005, Bulow and another individual, NCOG patient Kathrin Hoeyng, filed a qui tam action against NCOG alleging fraudulent billing practices. Finally, Bulow filed a second case against Illinois Union on February 2, 2006 alleging unpaid wages, violations of the California Labor Code, and a breach of fiduciary duty, and demanding, among other things, a dissolution of NCOG. These cases triggered coverage under NCOG's policy with IU, and IU agreed to defend NCOG in each of them, subject to a reservation of rights. IU then hired the law firm of Manning & Marder to defend NCOG.
IU paid Manning and Marder's bills and periodically notified NCOG of its remaining balance under the policy. For example, on July 24, 2007, IU informed NCOG that $500,000 had been spent in its defense and that "approximately $500,000 of the Policy limit remains." On October 10, 2007, IU informed NCOG that $717,775 had been spent and that "$282,225 of the Policy limit remains." In both correspondences IU noted, "Once the Policy limit is exhausted, coverage obligations, if any, to or on behalf of the Insureds will terminate and IU will not have a duty to defend any of the Insureds in the Lawsuits." NCOG responded to each of IU's updates, but only, as the arbitration panel put it, "in fairly nonspecific terms." NCOG agreed that IU had a continuing duty to defend it, but subtly hinted that it didn't agree that Manning and Marder's fees were eating away at its coverage under the policy.
On March 20, 2008*fn1 IU informed NCOG that it had exhausted its liability limit of $1 million under the policy. As such, IU explained, "coverage obligations, if any, to or on behalf of the Insureds have terminated and IU does not have a continuing duty to defend any of the Insureds in the Lawsuits." NCOG responded with a substantive analysis of the policy's terms, arguing that "NCOG's $1 million limit of liability is still intact and has not been reduced by the fees and costs that IU has paid to its panel defense counsel at Manning & Marder." NCOG then made its own arrangements to defend the underlying lawsuits, saw them to a final disposition, and initiated the arbitration that IU now appeals.
IU's position is that the costs of defending NCOG eat away at its coverage under the policy. NCOG's position is that they don't, and that IU has a duty to defend NCOG that is separate from its duty to insure NCOG against claims. The parties' arguments can both be understood as starting with the same policy provision:
Payments of Loss by Insurer shall reduce the Limit(s) of Liability under this Coverage Section. Costs, Charges and Expenses are part of, and not in addition to, the Limit(s) of Liability and payment of Costs, Charges and Expenses reduces the Limit(s) of Liability. If such Limit(s) of Liability are exhausted by payment of Loss, the obligations of the Insurer under this Coverage Section are completely fulfilled and extinguished. (Policy, 15.) The question is whether defense costs - the fees IU paid to Manning & Marder on NCOG's behalf - are a "Loss" under the policy.*fn2 IU says they are, and NCOG says they're not.
IU's position, merits aside, is certainly the more straightforward of the two. "Loss" includes "Costs, Charges and Expenses." The provision quoted above implies as much, and the policy elsewhere states, "Loss means the damages, judgments, settlements, including front pay and back pay, pre-judgment or post-judgment interest awarded by a court, and Costs, Charges and Expenses incurred by any of the Insureds." (Policy, 28.) But what counts as "Costs, Charges and Expenses"? The policy defines "Costs, Charges and Expenses," in relevant part, as "reasonable and necessary legal costs, charges, fees and expenses incurred by any of the Insureds in defending Claims." (Policy, 9.) Therefore, IU argues, its payments to Manning & Marder come out of NCOG's total coverage under the policy.
NCOG reasons from the same definitions of "Loss" and "Costs, Charges and Expenses" but seizes on the words "incurred by any of the Insureds" that appear in both. It denies that the fees paid by IU to Manning & Marder were "incurred" by NCOG, even though the payments were obviously made on NCOG's behalf, because IU had a separate contractual duty, under the policy, to defend NCOG. The policy states, "It shall be the duty of the Insurer and not the duty of the Insureds to defend any Claim" - and specifies no monetary limit. Moreover, NCOG argues, it didn't "incur" any legal fees; Manning & Marder sent its bills straight to Illinois Union, and Illinois Union paid them.
The arbitration panel ruled in favor of NCOG. It found that, at a minimum, the policy is ambiguous - and ambiguities in insurance policies are to be resolved against the drafter and in favor of broader coverage. The panel also found that NCOG's interpretation of the policy is reasonable. It was persuaded by several factors. First, the policy clearly provides that IU has a duty to defend NCOG, and the policy makes no mention "of any limit or offsets to the insurer's obligation to provide a defense." Second, the panel concluded that the inclusion of the words "incurred by any of the Insureds" in the definition of "Costs, Charges and Expenses" "was intentional and the only apparent reason was to limit the scope of Costs, Charges and Expenses." Third, the definition of "Loss" in the policy explicitly excludes from its scope "any amount for which the Insured is not financially liable or legally obligated to pay." This would appear to cover the costs of litigation, which IU, not NCOG, was legally obligated to pay under the policy. Finally, the panel "found it relevant, although not dispositive, that other policies issued by Respondent contained language that was . . . in our opinion, far more precise in terms of expressing an intention that monies spent on defense costs would reduce the monies otherwise available for coverage."
This Court's review of an arbitration award "is both limited and highly deferential." Poweragent Inc. v. Elec. Data Sys. Corp., 358 F.3d 1187, 1193 (9th Cir. 2004). The question for the Court certainly isn't whether it would have reached the same decision as the arbitration panel. Local Joint Executive Bd. of Las Vegas v. Riverboat Casino, Inc., 817 F.2d 524, 527 (9th Cir. 1987). "Broad judicial review of arbitration decisions could well jeopardize the very benefits of arbitration, rendering informal arbitration merely a prelude to a more ...