No Damages – No Case

Genuine Dispute Defeats Bad Faith Case

Magma Design Automation, Inc. appealed the district court’s grant of summary judgment for National Union Fire Insurance, Co. on Magma’s claims for breach of contract and breach of the covenant of good faith and fair dealing in Genesis Insurance Company v. National Union Fire Insurance Company, of Pittsburgh, PA, Magma Design Automation, Inc., No. 17-17362, United States Court of Appeals for the Ninth Circuit (August 12, 2019), the third time the parties brought their disputes to the Ninth Circuit.

The Ninth Circuit concluded it needed to determine, viewing the evidence in the light most favorable to the non-moving party, whether genuine issues of material fact exist and whether the district court correctly applied the relevant substantive law when it granted summary judgment to National Union.

THE LAW OF THE CASE

The Ninth Circuit concluded that district court properly granted summary judgment to National Union on Magma’s breach of contract claim. Contrary to Magma’s assertion, Genesis III did not establish as the law of the case that National Union breached its contract or that Magma was damaged as a result. See Genesis Insurance Co. v. Magma Design Automation, Inc., 705 F. App’x 505 (9th Cir. 2017) (Genesis III).

Under the “law of the case” doctrine, a court is generally precluded from reconsidering an issue previously decided by the same court, or a higher court in the identical case. For the law of the case doctrine to apply, the issue must have been decided explicitly or by necessary implication in the previous disposition. The application of the law of the case doctrine is discretionary, and a significant corollary to the doctrine is that dicta have no preclusive effect.

ANALYSIS

Equitable subrogation and breach of contract claims are two separate causes of action with different tests. Subrogation is a common law doctrine based in equity, although the right to subrogation derives from the contractual rights of the insured. In the case of insurance, subrogation takes the form of an insurer’s right to be put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid.

Genesis III did not establish as the law of the case that National Union breached its contract. Instead, the prior Genesis decisions affirm that National Union was liable to Genesis Insurance Company under the theory of equitable subrogation. In Genesis III, the court did not hold that National Union breached its contract with Magma, and National Union’s breach is not a necessary implication of the decision. The court was not considering a breach of contract claim, did not discuss the elements of a breach of contract claim, and did not explain how National Union breached its contract.

The district court also correctly held that Magma was unable to prove damages, entitling National Union to summary judgment on Magma’s breach of contract claim. First, Magma was not responsible for any portion of the settlement. Genesis contributed $5 million to the settlement of the claims and National Union repaid Genesis $5 million plus interest. The district court properly found that the “injury” that Magma asserts was hypothetical because Magma ultimately did not pay anything.

Second, Magma’s damages claim fails because the asserted damages could not have been proximately caused by National Union’s alleged breach. California law provides for breach of contract damages in the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.

Contrary to Magma’s assertions, National Union cannot be liable for Magma’s costs and attorneys’ fees expended in litigating which policy period was triggered, particularly when Magma’s position through Genesis I was that the notice of circumstances was sufficient to trigger the 2003-04 policy period, rendering Genesis, not National Union, liable.

In Genesis III, National Union’s liability was established for the first time. The court’s use of the word “now” is telling: “National Union is now liable for providing first-layer excess insurance coverage pursuant to the National Union 2004-06 Policy.”

Magma’s breach of contract claim fails because Magma was not liable for any portion of the settlement and National Union’s alleged breach was not the proximate cause of Magma’s asserted damages.

Genuine Dispute

The district court did not err in granting summary judgment on the claim of breach of the covenant of good faith and fair dealing. Magma argues that National Union violated the covenant by litigating coverage.

National Union’s dispute over its coverage liability, however, is protected under the “genuine dispute” doctrine. Century Sur. Co. v. Polisso, 43 Cal. Rptr. 3d 468, 487 (Ct. App. 2006) (the genuine dispute doctrine holds “an insurer does not act in bad faith when it mistakenly withholds policy benefits, if the mistake is reasonable or is based on a legitimate dispute as to the insurer’s liability.”); CalFarm Ins. Co. v. Krusiewicz, 31 Cal. Rptr. 3d 619, 629 (Ct. App. 2005) finding no bad faith in denial of coverage to indemnify where there was a “mistaken or erroneous withholding of policy benefits, if reasonable or if based on a legitimate dispute as to the insurer’s liability.”

ZALMA OPINION

An insurance company has the right to dispute coverage if there are reasonable facts and law supporting its position. Since it took two appellate decisions and three trial court decisions to find National Union, rather than another insurer, to be found responsible for a settlement, the dispute between it and the insured was clearly fair and genuine sufficient to avoid allegations of bad faith. One would think that once Magma had all of its obligations paid by insurers it should have been satisfied. Rather it unsuccessfully tried to profit from the claim by seeking attorneys fees and bad faith damages.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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