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Settlement When Insured Objects

BLUE RIDGE INSURANCE COMPANY, a                       No. 98-55052
Maryland corporation,
                                                     D.C. No.
                                                     REQUEST FOR
BRIGETTE JACOBSEN; JOHN                               CERTIFICATION
JACOBSEN,                                             DIRECTED TO
Defendants-Appellants.                                THE CALIFORNIA
                                                     SUPREME COURT
Appeal from the United States District Court
for the Central District of California
Irving Hill, District Judge, Presiding
Argued and Submitted
October 6, 1999--Pasadena, California
Filed November 29, 1999
Before: Pamela Ann Rymer and M. Margaret McKeown,
Circuit Judges, and Edward F. Shea, District Judge.1

Pursuant to Rule 29.5 of the California Rules of Court, we
certify to the Supreme Court of California a question relating
to an insurer's ability to recover settlement payments made
over the objection of the insured in connection with non-
covered claims. The answer may be determinative of the out-
1 Honorable Edward F. Shea, United States District Judge for the Eastern
District of Washington, sitting by designation.

come of this appeal. We find no controlling precedent in the
decisions of the California Supreme Court. We respectfully
request that the Supreme Court of California answer the certi-
fied question presented below. Our phrasing of the question
should not restrict the Court's consideration of the issue
involved, and we acknowledge that, in its discretion, the
Court may reformulate the question.
I. Caption of the Case
Brigette and John Jacobsen are deemed the petitioners in
this request because they are the appellants in this matter. The
caption of the case and the names and addresses of counsel
are as follows:
Maryland corporation,
James P. Wagoner, Wendy S. Lloyd, and Paul J. O'Rourke,
McCormick, Barstow, Sheppard, Wayte & Carruth, P.O. Box
28912, 5 River Park Pl. E., Fresno, California 93729-8912,
for the plaintiff-respondent.
Glenn A. Brown, Jr., Wasserman, Comden & Casselman,
P.O. Box 7033, 5567 Reseda Blvd, Suite 330, Tarzana, Cali-
fornia 91357-7033, for the defendants-petitioners.

II. Question of Law to be Answered
Whether an insurer defending a personal injury suit under
a reservation of rights may recover settlement payments made
over the objection of the insured when it is later determined
that the underlying claims are not covered under the policy.
III. Statement of the Facts
From sometime during the 1970s until late 1989, the peti-
tioners, Brigette and John Jacobsen, operated a dog kennel
business in Sun Valley, California. They specialized in
importing champion German Shepherd and Rottweiler dogs
from Germany and reselling them in the United States. Robert
and Edee Bolognesi, plaintiffs in the underlying action, also
operated a dog kennel business. The Bolognesis had in the
past purchased several dogs from Mrs. Jacobsen, some
directly from her kennel and some specifically imported from
Germany by her at their request.
Although Mrs. Jacobsen had shut down her kennel business
in 1989, in 1991 she assisted the Bolognesis in purchasing a
German Schutzhund III male Rottweiler dog--Benno Vom
Gelderland. Approximately five months later, Benno attacked
Mrs. Bolognesi, causing severe injuries. The Bolognesis sued
the Jacobsens, alleging theories of product liability, negli-
gence, and fraud. The Jacobsens tendered the defense to their
homeowner's insurer, Blue Ridge Insurance Company ("Blue
Blue Ridge disputed coverage on the grounds that the
Bolognesis' claims fell within either the "business pursuits"
exclusion or the "professional services" exclusion to the
homeowner's policy. Blue Ridge nevertheless agreed to
defend the Jacobsens subject to a reservation of its right to
challenge coverage:
      [B]ecause it appears likely that your liability in this
      action, if any, will not be covered under the policy,

      Blue Ridge Insurance Company hereby reserves its
      rights to:
      (c) Initiate a separate action to determine our duty to
      defend or indemnity you;
      (d) Obtain recovery from you of any costs or
      expenses, including fees for legal services[;]
      (e) Request your participation in any settlement of
      the above-titled action with the understanding that
      any contribution made by us is subject to the reser-
      vation of our right to dispute coverage, unless we
      expressly waive in writing all such reservations.
Shortly thereafter, Blue Ridge brought this declaratory judg-
ment action seeking adjudication of the coverage issue. The
district court stayed this matter pending resolution of the
underlying state court proceeding. Blue Ridge defended the
Jacobsens in the underlying action.
The Bolognesis then made a policy limits settlement
demand of $300,000 to the Jacobsens in the underlying state
action. A series of letters between Blue Ridge and the Jacob-
sens ensued. Blue Ridge informed the Jacobsens that it deter-
mined the settlement to be reasonable; proposed to accept the
demand under a reservation of its right to seek recovery of the
settlement amount from the Jacobsens should it be determined
that coverage did not exist; and gave the Jacobsens the option,
in the alternative, to assume their own defense should they
object to the reasonableness of the settlement offer.
The Jacobsens refused to consent to the settlement. They
maintained that they were not liable for Mrs. Bolognesi's
injuries and expected Blue Ridge to honor its duty to defend
them through judgment. Although the Jacobsens acknowl-

edged that Blue Ridge retained the right under the policy to
settle claims without their consent, they maintained that Blue
Ridge had no right to later collect such settlement payments
from them, especially when they refused to consent to the set-
tlement or to take over the defense in the first place because
of disputed liability.
Blue Ridge responded by offering to continue defending
the Jacobsens under its reservation of rights if they agreed to
waive their right to later claim Blue Ridge acted in bad faith
by not accepting the settlement should a judgment in the
underlying action exceed $300,000. As to the question of lia-
bility, Blue Ridge stated:
      While [you] assert[ ] that your clients "contest
      liability" and note[ ] the existence of evidence to
      support a claim that Mrs. Bolognesi voluntarily
      assumed the risk of her injury, you must candidly
      concede that there is likewise evidence to support a
      finding of liability on the part of the Jacobsens as
      well as evidence negating the defense of assumption
      of risk.
The Jacobsens responded later the same day: "[Y]our client
[Blue Ridge] has no right to settle a claim, absent an agree-
ment with its insured, and seek reimbursement from its
insured for the amount of the settlement."
Blue Ridge then sought to bind the Jacobsens to their state-
ment that they felt there was no liability in the underlying
action, in which case Blue Ridge would be relieved of any
obligation of settling the case and the Jacobsens would have
effectively waived any later bad faith claim based upon Blue
Ridge's failure to accept a settlement demand within policy
limits. In the absence of such agreement, Blue Ridge stated it
would have no choice but to accept what it considered a rea-
sonable settlement. The Jacobsens refused to consent to settle-

ment for the full policy amount. No alternative settlement
amount was discussed.
Having failed to secure the Jacobsens' consent, Blue Ridge
then sought to intervene in the underlying action for the pur-
pose of obtaining the trial court's permission to participate in
the settlement under a reservation of rights. The trial court
refused to allow Blue Ridge to intervene. After the trial court
denied its motion to intervene, Blue Ridge accepted the
Bolognesis' settlement demand on behalf of the Jacobsens,
but over their objection.
After settlement of the state court action, the stay was lifted
in this action, and Blue Ridge amended its complaint to assert
a claim for reimbursement of the $300,000 settlement pay-
ment. Blue Ridge did not seek reimbursement of fees and
The district court entered summary judgment in favor of
Blue Ridge on the coverage claim, finding both the "business
pursuits" and "professional services" exclusions applied. The
court also found the $300,000 settlement to be reasonable. On
the reimbursement claim, the district court considered four
factors to determine whether an insurer retains a right to reim-
bursement of a settlement for non-covered claims: (1) a reser-
vation of rights by the insurer; (2) notice to the insured of a
reasonable offer to settle coupled with an opportunity to take
over the defense should the insured elect not to consent;
(3) acceptance of a reasonable offer and the payment of policy
limits; and (4) lack of coverage for the underlying claim. The
court concluded that Blue Ridge reserved its right to seek
reimbursement, provided notice to the Jacobsens of its intent
to accept a reasonable settlement offer, gave them the option
of assuming the defense if they did not want to settle, and
accepted and paid the $300,000 settlement. Accordingly, the
district court granted summary judgment on the reimburse-
ment claim in favor of Blue Ridge.

IV. The Need for Certification and the Presence of a
      Contested Question
In the attached unpublished disposition, we affirm the dis-
trict court's conclusion that no coverage existed under either
the "business pursuits" or "professional services" exclusions
to the homeowner's policy and that the settlement was reason-
able. We are uncertain, however, whether California law pro-
vides Blue Ridge with a right to seek reimbursement of the
$300,000 settlement under these circumstances, particularly in
light of the Jacobsens express withholding of their consent to
the settlement and their assertion of no liability in the underly-
ing personal injury action. The answer to this question will
resolve an important question of insurance law, a matter that
we believe is best determined by the California Supreme
Court rather than a federal court.
The issue presented in this case is contested, and there
exists no clearly controlling precedent in the case law of the
California appellate courts. Blue Ridge argues that under
Johansen v. California State Auto Ass'n Inter-Ins. Bureau, 15
Cal. 3d 9 (1975), Val's Painting & Drywall, Inc. v. Allstate
Ins. Co., 53 Cal. App. 3d 576 (1975), and Maryland Casualty
Co. v. Imperial Contracting Co., 212 Cal. App. 3d 712
(1989), an insurer may seek reimbursement of settled sums
paid for uncovered claims in one of three ways: (1)  through
an express or implied agreement with its insured; (2) by
obtaining judicial authority to settle the matter under
Maryland Casualty; or, as was the case here, (3)  by tendering
the defense back to the insured after notifying it of a reason-
able settlement offer under Val's Painting. The Jacobsens
contend that Johansen, Val's Painting  and Maryland Casualty
allow an insurer to seek reimbursement of settlement pay-
ments for non-covered claims, but only after entering into an
agreement with its insured or obtaining prior judicial approval
of the settlement, neither of which occurred in this case. The
Jacobsens further assert that, as a policy matter, insurers
should not be permitted to in effect "spend" their insured's

money over the insured's objection. Blue Ridge counters that
the Jacobsens' position places an insurer in the difficult posi-
tion of deciding whether to pay sums it contends it does not
have a duty to pay, or refuse to settle the claims and risk sub-
sequent bad faith liability.
V. Summary of Law
A review of California case law reveals no case that
involved the circumstances here. The California Supreme
Court first suggested in Johansen that insurers may preserve
their right to seek reimbursement of monies paid to settle non-
covered claims. The issue in Johansen was whether an insur-
er's refusal to accept a reasonable settlement offer within pol-
icy limits on the ground that the policy does not provide
coverage violates the implied covenant of good faith and fair
dealing. The court held that an insurer who declines to accept
a reasonable settlement offer does so at its own risk and will
be held liable for all damages resulting from such refusal,
including damages in excess of the policy limit. Johansen, 15
Cal. 3d at 12. In so holding, the court addressed the insurer's
argument that such a rule would require insurers to settle all
cases irrespective of coverage:
      [C]ontrary to defendant's assertion, an insurer in
      defendant's position retains the ability to enter an
      agreement with the insured reserving its right to
      assert a defense of noncoverage even if it accepts a
      settlement offer. If, having reserved such rights and
      having accepted a reasonable offer, the insurer sub-
      sequently establishes the noncoverage of its policy,
      it would be free to seek reimbursement of the settle-
      ment payment from its insured.
Id. at 19. Although Johansen did not involve an insured's
effort to recover settlement monies, the case suggests that
when presented with a settlement offer in a situation where a
coverage question exists, an insurer retains the option to enter

into an agreement with its insured to accept the settlement
offer subject to a reservation of rights to later challenge cover-
age and, if non-coverage is established, to seek reimburse-
ment of the settlement. Johansen did not discuss or elaborate
on the nature of such an agreement, however, nor did it
address circumstances where no such agreement existed.
Two California Courts of Appeal cases have considered a
variation on the issue presented in Johansen. In Val's
Painting, decided soon after Johansen, the court considered
both the duty to defend and the duty to indemnify, noting that
the former is broader than the latter. There, Allstate agreed to
defend Val's under a reservation of rights and thereafter set-
tled the two pending cases for $3,200. Allstate then sought
reimbursement of fees and the settlement amount. The trial
court sustained the demurrer to Allstate's claim without leave
to amend. Because Val's had not yet pleaded, however, the
record was sparse. In rendering its decision, the Court of
Appeals recited a list of unknowns, resulting in a remand to
the trial court. The court noted that there were no allegations
that Val's refused to enter into a nonwaiver agreement, noti-
fied Allstate that it did not acquiesce in the reservation of
rights, was informed of the settlement offer, expressly or
implicitly agreed the settlement was reasonable, was given an
opportunity to assume the defense, or agreed to leave the
issue of coverage for future determination.
The essential holding of the court was that the insurer's res-
ervation of rights letter was insufficient, without more, to con-
stitute the agreement contemplated by Johansen . Val's
Painting, 53 Cal. App. 3d at 588. In particular, the Court
noted that the letter did not expressly state that the insurer
would look to its insured for any settlement amount paid and
could not reasonably be interpreted to provide the insurer with
"carte blanche" authority to settle "with what will turn out to
be the insured's own money." Id. In addition, the court found
no allegation or evidence offered by Allstate to the effect that
Val's knew of or agreed to the settlement offer, or was given

the opportunity to assume the defense. The court went on to
state that
      Absent an agreement by the insured--express or
      implied in fact--that the insurer may commit the
      insured's own fund toward any reasonable settle-
      ment, the insurer is not permitted to seek reimburse-
      ment for a particular settlement unless it has secured
      specific authority to make that settlement or has noti-
      fied the insured of a reasonable offer by the claimant
      and given the insured an opportunity to assume the
Id. The Jacobsens argue that this paragraph is dicta and, in
any event, does not specifically address the circumstances
here, whereas Blue Ridge argues that by giving the Jacobsens
an opportunity to assume the defense, Blue Ridge is entitled
to reimbursement.
Another California Court of Appeal, also construing
Johansen, reiterated that an insurer "retains the ability" to
enter into an agreement with its insured to reserve its right to
later challenge coverage after accepting a settlement offer on
its insured's behalf. Maryland Casualty, 212 Cal. App. 3d at
722. For cases in which an insured refuses to agree as in
Maryland Casualty, however, the insurer has three options:
      it could turn over the defense to [the insured ] and
      await the outcome of the declaratory relief action;
      relinquish its earlier reservation of rights and
      acknowledge coverage; or proceed with the settle-
      ment [and obtain an order permitting the insurer to
      participate in the settlement].
Id. The Maryland Casualty court reasoned that the trial
court's order authorizing the insurer to participate in the set-
tlement "fully comports with the concerns underlying the

Val's Painting rule," given that the insured was aware of the
settlement and its terms.
In this case, Blue Ridge sought to intervene in the underly-
ing action for purposes of obtaining an order allowing Blue
Ridge to settle on behalf of the Jacobsens. Because the trial
court denied the motion, Maryland Casualty does not provide
guidance in this case. This leaves us with Johansen and Val's
Painting, which also do not provide a clear answer. Specifi-
cally, it is unclear whether, under Johansen, an agreement is
a prerequisite to reimbursement. Similarly, it is unclear
whether Val's Painting is limited to its express holding
requiring that the letter at issue in that case did not, without
more, constitute the agreement contemplated by Johansen. Or
whether, on the other hand, Val's Painting stands for the
broader proposition that an agreement is not required where
there is notice to the insured plus an offer for the insured to
assume the defense. Although there have been other Califor-
nia cases that cite to Johansen and Val's Painting, the circum-
stances in those cases are not the same as those presented
here. See, e.g., Buss v. The Superior Ct. of Los Angeles, 16
Cal. 4th 35 (1997); Venture v. LMI Ins. Co., 66 Cal. App. 4th
478 (1998); Golden Eagle Ins. Co. v. Foremost Ins. Co., 20
Cal. App. 4th 1372 (1994). The most closely analogous case
is a Massachusetts case wherein the court cited both Johansen
and Val's Painting and commented on the different
approaches each court advanced. Medical Malpractice Joint
Underwriting Ass'n of Massachusetts v. Goldberg, 425 Mass.
46, 57-58 n.30, 680 N.E.2d 1121 (1997).
The answer to the certified question may be determinative
of the case pending before this panel. Because the parties
agree that there was no express or implied agreement here, the
answer to the certified question will establish the legal basis
for analyzing Blue Ridge's claim for reimbursement of settle-
ment payments. This court agrees to follow the answer pro-
vided by the California Supreme Court. For the foregoing

reasons, we respectfully request that the California Supreme
Court consider the above-certified question.
VI. Accompanying Materials
The Clerk of this court has been ordered to provide all rele-
vant briefs and excerpts of record with this request, along
with the unpublished disposition on the coverage issue, and to
forward all under the official seal of the Ninth Circuit pursu-
ant to Rule 29.5(c)-(d).
      Judge Pamela Ann Rymer
      Presiding Judge of the certifying panel

*** Any law, statute, regulation or other precedent is subject to change at any time ***

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