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Court of Appeal, Sixth District, California.

Harry GOSSARD, et al., Plaintiffs and Appellants, v. OHIO CASUALTY GROUP OF INSURANCE COMPANIES, et al., Defendants and Respondents.

No. H011643.

Decided: October 13, 1994

Fred R. Brinkop, Branson, Fitzgerald & Howard, Redwood City, for appellants. Robert Sallander, Archer, McComas & Lageson, Walnut Creek, for respondents.

This appeal arises out of an action against an insurer for bad faith and breach of contract after the insurer refused to defend the insured against a third party's action.   The trial court granted the insurer's summary judgment motion, finding no duty to defend because the insured's liability policy did not cover the action against him.   In subsequent proceedings, the court granted the insurer's second summary judgment motion seeking reimbursement of defense costs.

On appeal, the insured contends (1) the trial court erred in relying on his admissions during discovery to determine whether the complaint alleged “bodily injury” within the meaning of the policy;  and (2) the insurer was not entitled to reimbursement absent an explicit agreement with the insured.   We will affirm the judgment.


Appellant, Harry Gossard and Gossard Construction Company, was insured under a commercial general liability policy issued by respondent, Ohio Casualty Group of Insurance Companies and its subsidiary, West American Insurance Company.1  This policy covered, among other things, bodily injury and property damage caused by an “occurrence.”  “Bodily injury” was expressly defined in the policy as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.”  “Occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”   Among the exclusions from coverage was bodily injury “expected or intended from the standpoint of the insured.”

In August 1988, during the policy period, Bill Burger filed suit against appellant, claiming mistake, fraud, breach of fiduciary duty, intentional interference with prospective economic relationships, and negligent interference with prospective economic relationships.   This action arose out of a business arrangement between Burger and Gossard to create a limited partnership for the purpose of developing and selling a residential subdivision in Santa Clara County.

Burger sought reformation of contract, specific performance, and damages.   In asserting the fifth cause of action for fraud, Burger claimed he had suffered “great emotional and mental distress and suffering with attendant physical manifestations, in a sum as of yet unascertained.”   In the eighth cause of action for negligent interference with prospective economic relationships, Burger did not specifically claim emotional or physical injury, but only alleged that he had suffered economic damage from appellant's interference with his relationships with prospective purchasers of lots in the subdivision.   Burger did, however, preface this cause of action by incorporating several previous paragraphs by reference.   One of those paragraphs included the allegation of emotional distress contained in the fraud cause of action.

Appellant tendered his defense to respondent.   Respondent initially declined to accept the defense “on the sole ground that Gossard and Gossard Construction are being sued in connection with a partnership or joint venture that is not shown as a named insured in the delcarations [sic ].”  In November 1989 appellant filed the instant action against respondent, asserting breach of contract and bad faith and requesting a declaration that respondent owed a duty to defend him against the Burger complaint.   In January 1990 respondent sent appellant a letter in which it agreed to assume the defense, but it expressly reserved the right to assert that it had no duty to defend or indemnify appellant and the right to seek reimbursement of defense costs.

In January 1991 the underlying action was resolved against Burger by arbitration.   In March 1991, respondent filed a cross-complaint against appellant, seeking a declaration that it had had no duty to defend appellant in the underlying action and that it was entitled to recoup its defense costs.   Respondent then submitted three requests for admissions.   Appellant responded to the first two requests by “admitting” that Burger's complaint had not alleged property damage, advertising injury, or personal injury,2 but denying the absence of a claim for bodily injury.

Appellant's responses to the third set of requests for admissions became the basis for respondent's summary judgment motion.   Paragraphs 21 and 22 requested the following:  “21.   Admit that the only allegations in the Burger complaint which could possibly fall within the definition of ‘bodily injury,’ as that term is defined in the West American policy, were made solely in connection with Burger's Fifth Cause of Action for fraud.  [¶] 22.   Admit that the Fifth Cause of Action for Fraud is the only cause of action in the Burger complaint that contains any allegations that could possibly fall within the definition of ‘bodily injury,’ as that term is defined in the West American policy.”

Appellant responded as follows:  “RESPONSE TO REQUEST NO. 21:  Admit.   However, potential amendments to the Complaint could make additional claims for ‘bodily injury’ outside of Burger's fifth cause of action for fraud.  [¶] RESPONSE TO REQUEST NO. 22:  Admit.   However, potential amendments to the Complaint could make additional claims for ‘bodily injury’ outside of Burger's fifth cause of action for fraud.”

In July 1992 respondent moved for summary judgment on the ground that none of the claims in Burger's complaint were covered by appellant's liability policy.   First, respondent pointed out, appellant had admitted that none of Burger's claims constituted property damage, personal injury, or advertising injury.   As for bodily injury, respondent relied on appellant's admissions, arguing that “[t]he only claims in the underlying action which could possibly trigger the bodily injury definition [in the policy] are claims of emotional distress [which are] contained solely in the fraud cause of action․   Emotional distress is not recoverable in fraud cases.   Accordingly, such allegations do not trigger a carrier's duty to defend.”   Thus, respondent contended, in light of the undisputed facts, including appellant's admissions, there was no duty to defend appellant and hence no breach of contract or bad faith as a matter of law.

In his opposition to the summary judgment motion appellant maintained that the eighth cause of action, negligent interference with prospective economic advantage, included an allegation of emotional distress with bodily injury, since it had incorporated that allegation from the fifth cause of action for fraud.   Appellant also argued that the facts supported potential amendments of the complaint to allege negligent supervision, negligent misrepresentation, and negligence by a fiduciary.3

The trial court granted respondent's motion, finding no disputed facts as to bodily injury or property damage.   In ruling on the request for declaratory relief as to the bodily injury claim, the trial court commented:  “Gossard has conceded that the only underlying bodily injury claims, if any, arise out of Burger's fifth cause of action for fraud.   Gossard does not allege that Burger premised any bodily injury claims on anything else other than fraud.  [¶] The only damages recoverable for fraud are out-of-pocket losses.  [Citation.]   Strictly economic losses do not fall within the definition of ‘bodily injury’.  [Citation.]  [¶] Since the only potential claims for bodily injury are in connection with fraud, and bodily injury is not recoverable for fraud, there is no potentiality of coverage under the bodily injury coverage contained in the West American policy.”   The court later denied appellant's motion for reconsideration.

In February 1993 both parties moved for summary judgment on the issue of respondent's entitlement to reimbursement for the costs it had incurred in defending the “non-covered” claims.   Appellant argued that it had never agreed to reimburse respondent for these expenses.   The trial court, however, found that appellant had impliedly agreed to the reservation of rights by accepting respondent's payment of defense costs.   Accordingly, the court ruled that respondent was entitled to recoup $96,627 in defense fees from appellant.   The court thereafter entered judgment for declaratory relief in favor of respondent.


1. Scope of Review

 On appeal from a summary judgment, the reviewing court must independently determine whether the moving party has established facts which justify judgment in its favor as a matter of law.  (Code Civ.Proc., § 437c, subd. (c).)  To be entitled to summary judgment, the moving papers must establish a complete defense to the allegations or demonstrate the insufficiency of an essential element of the complaint.  (Saldana v. Globe–Weis Systems Co. (1991) 233 Cal.App.3d 1505, 1510–1511, 285 Cal.Rptr. 385.)   The motion must stand self sufficient and will not succeed merely because the opposition is weak.  (AARTS Productions, Inc. v. Crocker National Bank (1986) 179 Cal.App.3d 1061, 1064, 225 Cal.Rptr. 203.)  “[I]f the facts presented in the moving party's separate statement, even if true, do not require or permit the desired ruling, the motion will be denied without further analysis.   It is only if the facts stated, if true, require the desired ruling that the court examines the sufficiency of the evidentiary support and, if it is sufficient, looks to the opposing papers to determine whether there is a triable issue of material fact.”  (United Community Church v. Garcin (1991) 231 Cal.App.3d 327, 338, 282 Cal.Rptr. 368;  LaRosa v. Superior Court (1981) 122 Cal.App.3d 741, 744–745, 176 Cal.Rptr. 224.)

In this case, the essential facts are undisputed.   The only question before us is whether appellant's liability policy potentially covered Burger's claims, thereby invoking respondent's duty to defend appellant in the action.   This is a question of law which we determine independently.  (Hurley Construction Co. v. State Farm Fire & Casualty Co. (1992) 10 Cal.App.4th 533, 538, 12 Cal.Rptr.2d 629;  American Motorists Ins. Co. v. Allied–Sysco Food Services, Inc. (1993) 19 Cal.App.4th 1342, 1354, 24 Cal.Rptr.2d 106.)

2. Duty to Defend

We begin with the fundamental principles governing an insurer's duty to defend.   This duty arises “whenever [the insurer] ascertains facts which give rise to the potential of liability under the policy.”  (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 276–277, 54 Cal.Rptr. 104, 419 P.2d 168.)   “Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify;  an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded.”  (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792.)

 The determination of an insurer's duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy.   Facts extrinsic to the complaint may give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy.  (Horace Mann Ins. Co. v. Barbara B., supra, 4 Cal.4th at p. 1081, 17 Cal.Rtpr.2d 210, 846 P.2d 792.)   By the same token, where undisputed extrinsic facts establish that the policy does not cover a claim, the insurer will not be required to defend the action.  (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 298–299, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)   Any doubt as to whether these facts establish the existence of the defense duty must be resolved in the insured's favor.  (Id. at p. 299–300, 24 Cal.Rptr.2d 467, 861 P.2d 1153, citing United Pacific Ins. Co. v. McGuire Co. (1991) 229 Cal.App.3d 1560, 1567, 281 Cal.Rptr. 375;  CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 607, 222 Cal.Rptr. 276.)

On appeal, both parties essentially renew the positions they assumed in the court below.   Appellant contends that the trial court erroneously based its ruling on admissions 21 and 22, which acknowledged that the Burger complaint claimed bodily injury solely in the context of the fifth cause of action for fraud.   The error in this misplaced reliance, according to appellant, was twofold.   First, appellant “did not admit that Burger's bodily injury claims arose solely out of fraud․ [but] only that Burger's claim for bodily injury was found within the first 60 paragraphs.”   When Burger incorporated these paragraphs by reference into the claim for negligent interference with prospective economic advantage, he implicitly stated a claim of bodily injury as part of a negligence cause of action.  “Accordingly, the allegations of the Burger Complaint fall squarely within the indemnity provisions of the West American policy.”

Second, appellant argues, even if the admissions are interpreted in the manner suggested by respondent and the trial court, they were given inappropriate significance.  “Obviously, the contents of the Burger Complaint speak for themselves and any request for admission pertaining to the intent of the drafter can only be interpreted as requesting that party's opinion regarding the drafters [sic ] intent.”

Respondent characterizes appellant's position on appeal as a belated attempt to modify or retract admissions 21 and 22 on the ground that they were “mistakenly made.”   Respondent urges this court to hold appellant to his admissions, which respondent assumes conclusively “eliminate any duty to defend” and therefore compel summary judgment in its favor.

Respondent misunderstands appellant's position, however.   Appellant is not seeking to withdraw or modify his admissions;  the point of his second argument is only that the trial court placed undue reliance on the admissions in granting respondent's summary judgment motion.   The admissions were not facts, he argues, but only his interpretation of a third party's allegations;  therefore, they were not conclusive on the question of whether Burger claimed bodily injury as a result of negligence.

Thus, the relevant question on appeal is not, as respondent characterizes it, whether appellant should be bound by his admissions, but rather the effect of those admissions on this court's determination of the potential for coverage and the resulting duty to defend.   It is on this question that we focus in the ensuing discussion.

Appellant does not dispute the trial court's determination that emotional distress damages, including its physical manifestations, were not recoverable in the fifth cause of action for fraud.4  Appellant instead relies on the proposition that the physical component of such distress constituted bodily injury, and was properly incorporated as an item of damage into the eighth cause of action for negligent interference with prospective economic advantage.

 In maintaining it had no duty to defend, respondent reasons as follows:  bodily injury was alleged solely in the fifth cause of action for fraud;  such injury was the product of emotional distress;  emotional distress damages are not recoverable in an action for fraud.   Logical as it appears, this argument misses the mark.   An analysis of the potential for coverage must encompass not only the claim of damage as pleaded, but also the possibility that the plaintiff could later amend the complaint to state a claim that is covered by the insured's policy.5  (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 277, 54 Cal.Rptr. 104, 419 P.2d 168 [duty to defend where complaint charging intentional assault could have been amended to allege negligence or self-defense];  see also Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 304, 24 Cal.Rptr.2d 467, 861 P.2d 1153 [though complaint did not specify whether conduct was intentional or negligent, allegations sufficed to raise possibility of coverage];  CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d at pp. 610–612, 222 Cal.Rptr. 276 [complaint could have been amended, thereby creating potential for coverage].)  “[An insurer] cannot construct a formal fortress of the third party's pleadings and retreat behind its walls.   The pleadings are malleable, changeable and amendable.”  (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 276, 54 Cal.Rptr. 104, 419 P.2d 168;  Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 299, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

 Furthermore, a third-party plaintiff's placement of his allegations in a particular section of the complaint is not controlling.   As our Supreme Court noted in Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 275, fn. 14, 54 Cal.Rptr. 104, 419 P.2d 168, “ ‘The insured probably would be surprised at the suggestion that defense coverage might turn on ․ how the third party's attorney decided to write the complaint.’  [Citation.]”

Thus, although we disagree with appellant's representation of the pleadings,6 this point is immaterial;  a potential for coverage would have arisen if the complaint could have been amended to plead bodily injury within the meaning of the policy language.   Respondent would be relieved of its duty to defend appellant only if Burger's complaint “can by no conceivable theory raise a single issue which could bring it within the policy coverage.”   (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 276, fn 15, 54 Cal.Rptr. 104, 419 P.2d 168.)

 We do not question appellant's assumption that emotional distress “with attendant physical manifestations” constitutes bodily injury within the meaning of the standard liability policy.  (See Aim Insurance Co. v. Culcasi (1991) 229 Cal.App.3d 209, 227, 280 Cal.Rptr. 766;  accord, Chatton v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 846, 854–857, 13 Cal.Rptr.2d 318.)   We also do not disagree with appellant's argument that claims of negligent interference with prospective economic advantage are cognizable in this state.  (See J'Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 803, 157 Cal.Rptr. 407, 598 P.2d 60.)   Instead, the outcome of this case turns on the relationship between this tort and bodily injury in the context of insurance coverage.   The relevant question is whether the facts underlying the complaint could have supported a claim of bodily injury arising from the tort of negligent interference with prospective economic advantage.   In other words, if Burger had properly alleged bodily injury in the eighth cause of action, would that allegation have been sufficient to raise a reasonable expectation by appellant that he would be covered by his liability policy?  (Cf. Aim Insurance Co. v. Culcasi, supra, 229 Cal.App.3d at p. 218, 280 Cal.Rptr. 766.)   Our review of applicable precedent convinces us that the answer must be no.

 In Chatton v. National Union Fire Ins. Co., supra, 10 Cal.App.4th 846, 13 Cal.Rptr.2d 318, the First District, Division Four, considered whether an emotional distress claim was covered under a comprehensive general liability policy held by an investment and financial services company.   The court agreed with this court's holding in Aim Insurance Co. v. Culcasi, supra, 229 Cal.App.3d 209, 280 Cal.Rptr. 766, that emotional distress without physical manifestations is not “bodily injury” within the meaning of the insured's policy.   The court also held that emotional distress for investment losses caused by negligent misrepresentations was not within the scope of the bodily injury provisions of the insured's liability policy.

Keating v. National Union Fire Ins. (1993 9th Cir.) 995 F.2d 154, 156 extended Chatton to a third-party complaint that alleged emotional and physical distress resulting from bad investment advice by the insured.   Because these injuries were induced by economic loss, which was not covered by the liability policies at issue, there could be no reasonable expectation by the insured that they were protected from the plaintiffs' claims.  “It would expand coverage of these policies far beyond any reasonable expectation of the parties to sweep within their potential coverage any alleged emotional or physical distress that might result from economic loss that is itself clearly outside the scope of the policy.”  (Ibid.)

The First District, Division Four, agreed with the Keating rationale in McLaughlin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, 29 Cal.Rptr.2d 559, which arose from the same facts as Chatton.   In McLaughlin, the plaintiffs alleged that they had suffered economic loss as well as “ ‘mental, physical and emotional distress.’ ”  (Id. at p. 1150, 29 Cal.Rptr.2d 559.)   The court held that the insured's liability policy did not cover their physical distress, because it “derived from their investment loss which in turn was negligently inflicted upon them by the insureds․  [¶] [S]ince Plaintiffs' physical distress was induced by an uncovered economic loss it defies reason that bodily injury coverage would nevertheless independently obtain.”  (Id. at p. 1151, 29 Cal.Rptr.2d 559, citing Keating v. National Union Fire Ins., supra, 995 F.2d at p. 156.)

We find the reasoning in Keating and McLaughlin persuasive and adopt a similar approach in the instant case.  (See also Waller v. Truck Insurance Exchange (1994) 27 Cal.App.4th 674, 688–689, 32 Cal.Rptr.2d 692.)   Indeed, the very nature of this tort, negligent interference with prospective economic advantage, is an injury to economic interests.  (J'Aire Corp. v. Gregory, supra, 24 Cal.3d at p. 805, 157 Cal.Rptr. 407, 598 P.2d 60;  see also Youst v. Longo (1987) 43 Cal.3d 64, 71, 233 Cal.Rptr. 294, 729 P.2d 728.)   That emotional and physical distress could accompany such injury does not change its essential character.

It is noteworthy that the damage alleged in the eighth cause of action was strictly economic:  “ALL DEFENDANTS breached their duties of care to plaintiff, and that their acts, conduct and omissions foreseeably interfered with and disrupted the SUBJECT ECONOMIC RELATIONSHIPS and/or said conduct, acts and omissions rendered continuation of the SUBJECT ECONOMIC RELATIONSHIPS more burdensome and expensive, thereby causing plaintiff damage.” 7  Moreover, even if the Burger complaint had been amended to allege emotional and physical distress in the context of a negligence cause of action (such as negligent interference with prospective economic advantage), such injury nonetheless was clearly induced by economic loss.

Appellant does not point to any other facts, either asserted by Burger or within the scope of a possible amendment, that could conceivably be characterized as physical injury not derived from an economic loss.   No extrinsic facts known to respondent suggested that bodily injury was suffered in any form other than as a secondary effect of economic harm.   It is apparent to this court, therefore, that the facts underlying Burger's complaint could not have supported an allegation of bodily injury as defined by the policy at issue here.

Accordingly, we must conclude that no reasonable construction of Burger's claim could have brought it within the coverage of appellant's liability policy.   Since appellant could not have had a reasonable expectation of coverage, respondent had no duty to defend against the complaint.

3. Recoupment of Defense Fees

We next turn to the question of whether respondent was entitled to be reimbursed for the costs it incurred in defending the action brought by Burger.   Appellant contends that an insurer may not unilaterally reserve the right to recoup defense fees without an explicit agreement with the insured.   Alternatively, appellant contends summary judgment was precluded by a triable factual issue regarding the existence of an express or implied agreement for reimbursement.

 Appellant misunderstands the law.   In California, it is well established that reimbursement is available to an insurer if it has either secured a nonwaiver agreement from the insured 8 or made an adequate reservation of rights.  (Val's Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 585, 126 Cal.Rptr. 267, fn. omitted;  Insurance Co. of the West v. Haralambos Beverage Co. (1987) 195 Cal.App.3d 1308, 1319, 241 Cal.Rptr. 427.)

When an insurer chooses to defend a lawsuit under reservation of rights, it typically sends a letter to the insured stating its intention to assert noncoverage and seek reimbursement if it later shows it had no duty to defend the action.   In such cases, “[t]he insurer need only notify, or attempt to notify, the assured that it is conducting the investigation and defense of the tort claim under a reservation of the right to assert policy defenses at a later time, and the assured's silence will usually be deemed acquiescence.”   (Val's Painting & Drywall, Inc. v. Allstate Ins. Co., supra, 53 Cal.App.3d at p. 586, 126 Cal.Rptr. 267.)

 The Val's case elucidates the obligation of the insurer who wishes to protect its right to deny coverage or recoup defense costs from the insured:  it must either obtain an express agreement from the insured or clearly convey to the insured its intention to seek reimbursement if it later establishes no duty to defend the underlying action.   Appellant thus inaccurately states the law of California as requiring “an explicit agreement” before the insurer is entitled to recoupment.

The cases on which appellant relies do not support an alternative interpretation.  Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 231 Cal.Rptr. 791, for example, did not establish a rule that an insurer may never recover defense fees based on a reservation of rights;  the court only determined that the letter sent to the insured was insufficient to preserve those rights.   The reservation-of-rights letter did not mention that the insurer intended to seek reimbursement of attorney's fees and costs.   Further, the practice of the insurer was not to seek recovery of such fees, and a representative of the insurer testified that the letter was not intended to convey an intent to do so.   Under those specific circumstances, the Lesher court held that the letter was insufficient as a matter of law to entitle the insurer to the fees it sought.

Likewise, in Reliance Ins. Co. v. Alan (1990) 222 Cal.App.3d 702, 272 Cal.Rptr. 65, the court did not hold that letters reserving the right to reimbursement were insufficient as a matter of law.   The court denied the claim of the insurer in that case only because the insurer's claim was based on a theory of equitable restitution, which is not recognized as a basis for the insurer's recovery in this state.  (Id. at p. 709, 272 Cal.Rptr. 65.)   The court noted that reimbursement could be obtained only if there had been an agreement or understanding between the parties that the insured would reimburse the insurer.   Since no evidence of such agreement or understanding had been presented, the court reversed the order of reimbursement.

Appellant also cites Insurance Co. of the West v. Haralambos Beverage Co., supra, 195 Cal.App.3d 1308, 241 Cal.Rptr. 427, and State Farm Fire & Cas. Co. v. Thomas (N.D.Cal.1991) 756 F.Supp. 440, for the proposition that reimbursement of litigation costs is unavailable to an insurer absent an express agreement.   Neither of these cases is helpful to appellant.   In Haralambos, neither the oral reservation of rights nor a subsequent letter stated the insurer's intent to seek recovery for litigation costs.   The letter reserved only the insurer's right “to deny coverage outright at a later date,” without mentioning reimbursement.  (Id., 195 Cal.App.3d at p. 1314, 241 Cal.Rptr. 427.)   The Thomas court misread Haralambos in assuming that an insured's silence alone establishes the absence of an agreement or understanding of the insurer's intent to seek reimbursement.

Both the Haralambos and the Thomas courts inappropriately relied on St. Paul Mercury Ins. Co. v. Ralee Engineering Co. (1986 9th Cir.) 804 F.2d 520, in asserting the requirement of “an agreement or understanding” of the insurer's intent to seek recovery of litigation costs.  (Haralambos, supra, 195 Cal.App.3d at p. 1323, 241 Cal.Rptr. 427;  Thomas, supra, at pp. 445–446.)  Ralee did not decide that recoupment is always unavailable absent an explicit agreement with the insured.   Rather, the court refused reimbursement because the insurer's reservation of rights pertained only to an anticipated denial of future coverage or refusal of further defense.   Because there was no reservation of the right to seek reimbursement, there could be no understanding between the parties on this point.

Two other federal cases have correctly applied California law on this issue.   In Omaha Indem. Ins. Co. v. Cardon Oil Co. (N.D.Cal.1988) 687 F.Supp. 502, 504, the insurer “specifically reserve[d] its right to seek reimbursement of all defense costs” paid on behalf of the insured.   The insureds, like appellant in the present case, argued that their silence could not be considered acquiescence, even though they conceded they were aware of the insurer's intent.   Distinguishing Haralambos and St. Paul, supra, the district court ruled that the insurer's reservation of rights was sufficient to entitle it to reimbursement of litigation costs.

In Walbrook Ins. Co. Ltd. v. Goshgarian & Goshgarian (C.D.Cal.1989) 726 F.Supp. 777, the court followed Omaha Indemnity in the context of an insured who objected to an explicit reservation of right to seek reimbursement.   Notwithstanding their objection, the insured accepted $500,000 in defense costs from the insurer.   This conduct was held to constitute an implied agreement to the reservation.

Recently, in American Motorists Ins. Co. v. Allied–Sysco Food Services, Inc. (1993) 19 Cal.App.4th 1342, 24 Cal.Rptr.2d 106, the First District, Division Two, considered the issue of reimbursement where a reservation-of-rights letter was conditioned on the insured's express approval.   Since there was no showing of such approval, there was no agreement to the reservation and the insured was not entitled to reimbursement.   In so holding, the court impliedly concurred with the statement of California law by the Omaha Indemnity and Walbrook courts, thereby reaffirming the rule that the insurer may make a unilateral reservation of rights, “and the insured's nonqualified [sic ] acceptance of the defense is deemed to be acquiescence.”  (Id. at p. 1356, 24 Cal.Rptr.2d 106.)

In the case before us, respondent initially declined appellant's tender of defense, but after further investigation, it agreed to assume the defense.   In its letter informing appellant of this decision, respondent cautioned appellant that it was not conceding any issues respecting coverage.   Accordingly, respondent stated:  “West American hereby expressly reserves its right to assert that there is not a duty to defend or indemnify either all or a part of the Burger [action] on the grounds set forth herein, or upon such other grounds as may be disclosed by subsequent investigation and discovery.”   Respondent reminded appellant that it believed the policy did not cover many of the damages stated in the complaint, and suggested that appellant might want to retain separate counsel to represent him on issues of coverage.

Respondent's letter further stated:  “West American expressly reserves the right to resolve any coverage issues between West American and you by a suit for declaratory or other relief.  [¶] In the event it is determined that some or all of the claims in the Burger action are not covered under West American's policy of insurance, West American hereby expressly reserves its right to allocate between covered and non-covered claims any payments of settlements and judgments and defense costs and to seek reimbursement from you for any such payments and defense costs․  [¶] No payment by [sic ] of settlements and/or judgments and defense costs shall constitute a waiver of West American['s] right to seek later allocation and reimbursement of such settlements and/or judgments and defense costs on the ground that there is no duty to defend or indemnify all or a portion of the instant action.”

In concluding, respondent again asserted its position on the matter of reimbursement:  “This letter, West American's continuing investigation, as well as [sic ] any further activity on this claim, is subject of [sic ] a full reservation of all our rights under the policy and at law, including, but not limited to, the right to assert that West American has no duty to defend or indemnify you.   In addition, nothing contained in this letter should be construed by you as a waiver of any of the other terms or conditions of the West American policy.”

Respondent's separate statement of undisputed facts asserted that it had accepted appellant's defense subject to a full reservation of rights, including the right to seek reimbursement of any payments and defense costs.   In his responsive statement of undisputed facts appellant admitted that “WEST AMERICAN accepted GOSSARD'S defense subject to a reservation of rights, the extent of which reservation is set forth in its January 22, 1990 reservation of rights letter, which document speaks for itself.”

Accompanying his own motion for summary judgment was appellant's separate statement of undisputed facts, which also acknowledged respondent's reservation-of-rights letter.   In his supporting declaration, however, Gossard conveyed an incomplete understanding of this letter.   Gossard admitted he was aware that respondent was reserving “its right to deny indemnity” and “its right to withdraw its defense at any time” if a court were to determine there was no defense obligation to him.   Nevertheless, he stated, he “was not aware that [respondent] would seek reimbursement of those amounts expended in defense of the Burger Complaint.”

There is no factual dispute as to whether the letter was received.   Instead, appellant suggests the reservation of rights was “anything but clear” regarding reimbursement, and therefore appellant justifiably did not understand respondent's intent.   Appellant further complains that respondent did not inform him that it was carrying out its intention to seek reimbursement until two months after the underlying litigation was resolved against Burger.

These arguments cannot succeed.   The document is neither ambiguous nor unclear;  it unequivocally reserved the right “to seek reimbursement from [appellant] for any ․ payments and defense costs.”   Indeed, no conflicting meaning is even suggested by appellant.   That appellant may not have read this portion of the letter as carefully as the rest does not create a triable issue of fact regarding the adequacy of respondent's communication of intent.   It is also not significant that appellant did not know whether respondent would act on that reservation.   Appellant's attempts to raise a material factual dispute on the issue of respondent's reservation of rights must be rejected.

In summary, we conclude that respondent had no duty to defend the third-party action against appellant.   Because respondent adequately reserved its right of reimbursement, it was entitled to recoup the amount of litigation costs paid for appellant's defense.   The award of $96,627 was properly made.


The judgment is affirmed.


1.   Respondent also provided appellant with an umbrella policy, which is not the subject of dispute in this appeal.

2.   Appellant initially asserted that the complaint did state a claim of personal injury.   He later admitted, however, that there were no allegations constituting personal injury as that term is defined in the policy.

3.   Appellant further attempted to establish that the complaint stated a claim of property damage and personal injury.   The trial court found that the complaint did not allege property damage, personal injury or advertising injury.   Appellant does not challenge these findings on appeal, and we will not mention them further in this discussion.

4.   Appellant did, however, properly distinguish the case on which respondent and the trial court relied.  (See Devin v. United Services Auto. Assn. (1992) 6 Cal.App.4th 1149, 8 Cal.Rptr.2d 263 [emotional distress claim against insured did not include allegation of physical manifestations].)

5.   Respondent suggests that it is “of no moment” that Burger might have amended his complaint to include damages covered by the policy, because he did not in fact do so.   This observation is not helpful to respondent.   The duty to defend is measured at the outset of the litigation, not by hindsight.  (Devin v. United Services Auto. Assn., supra, 6 Cal.App.4th at p. 1157, 8 Cal.Rptr.2d 263;  CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d at p. 610, 222 Cal.Rptr. 276.)   The determination must be made “from the facts and inferences known to an insurer from the pleadings, available information and its own investigations at the time of the tender of defense.”  (CNA Casualty of California v. Seaboard Surety Co., supra, at p. 610, 222 Cal.Rptr. 276.)   Thus, whether Burger eventually amended his complaint is not relevant to the determination of potential coverage.

6.   Our reading of the complaint does not support the assertion that the eighth cause of action included emotional distress damages.   Burger incorporated by reference a series of paragraphs, some of which pertained to alleged acts of “fraud and/or constructive fraud and/or intentional breach of fiduciary obligations.”   Emotional distress was specifically alleged as “a direct and proximate result” of those acts of fraud.

7.   “SUBJECT ECONOMIC RELATIONSHIPS” refers to contractual relationships between Burger and prospective purchasers of the lots Burger was to have received from appellant.

8.   A nonwaiver agreement is a “ ‘bilateral contract, normally in writing, entered into by the assured and the insurer after the accident, providing that the insurer will defend the tort suit while reserving its right to assert nonliability under the policy at a later date․’  [Citation.]”  (Val's Painting & Drywall, Inc. v. Allstate Ins. Co., supra, at p. 586, 126 Cal.Rptr. 267.)

MIHARA, Associate Justice.

PREMO, Acting P.J., and WUNDERLICH, J., concur.