Post by darkstar2 on Aug 18, 2008 17:41:53 GMT
FOR PUBLICATION
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
RAYMOND MANZAREK; DOORS TOURING, INC., a California corporation, No. 06-55936
Plaintiffs-Appellants, D.C. No.v. CV-06-02082-RST. PAUL FIRE & MARINE OPINION INSURANCECOMPANY, a Minnesota corporation, Defendant-Appellee.
Appeal from the United States District Courtfor the Central District of California
Manuel L. Real, District Judge, PresidingArgued and
SubmittedFebruary 11, 2008—Pasadena, California
Filed March 25, 2008
Before: Alfred T. Goodwin, Betty B. Fletcher, andN. Randy Smith,
Circuit Judges.Opinion by Judge N.R. Smith
2971 COUNSEL
Kirk A. Pasich, Esq., Dickstein Shapiro LLP, Los Angeles,
California,
for the plaintiffs-appellants. Andrew R. McCloskey, Esq., Riedl,
McCloskey & Waring LLP, San Diego, California, for the defendant-appellee.
OPINION N. R. Smith, Circuit Judge:
We hold that the district court erred by dismissing Raymond Manzarek’s and Doors Touring, Inc.’s (“DTI”)
amended complaint because the underlying complaints raised
at least the potential for coverage under the operative insur-
ance policies. We further hold that the district court abused its
discretion by not giving Manzarek and DTI an opportunity to
amend their complaint. We have jurisdiction under 28 U.S.C.
§ 1291.
We reverse and remand for further proceedings.
I. Background
A. Underlying Lawsuits This insurance coverage and bad faith lawsuit arose out oftwo lawsuits (“Underlying Lawsuits”) filed in California state court against Manzarek (a founding member of the classic rock group The Doors), DTI, and the other members of Manzarek’s band at the time of the filing of the lawsuits.
John Densmore (the former drummer for The Doors) filed one of
the Underlying Lawsuits (“Densmore Lawsuit”). The parents
of Jim Morrison (the former vocalist for The Doors) and the
parents of Pamela Courson (Morrison’s late wife) together
filed the other underlying lawsuit (“Courson Lawsuit”).
Both Underlying Lawsuits alleged that Manzarek and members of 2975 MANZAREK v. ST. PAUL FIRE & MARINE INS. his band were liable for infringing on The Doors name, trade- mark, and logo in conjunction with their planned national and international tours. Both Underlying Lawsuits included alle- gations against Manzarek and DTI for the improper use of The Doors logo in conjunction with the marketing of products and merchandise. Additionally, the Densmore Lawsuit alleged that the breaches by Manzarek and his band caused Densmore to suffer economic damages as well as damage to his “reputation and stature by causing people to believe that he was not, and is not, an integral and respected part of The Doors band, or is one member who easily can be replaced by another drummer.” The state trial court consolidated the Underlying Lawsuitsfor trial but reserved some equitable claims for determination by the court. At trial, the jury found Manzarek and the other defendants liable on some claims but awarded no damages.
The record before us is not clear what result the state trial
court reached on the equitable claims that it removed from the
jury’s consideration. Manzarek’s and DTI’s defense fees and
costs in the Underlying Lawsuits exceeded $3 million.
B. The Policies
From May 24, 2002 to May 24, 2003, St. Paul Fire & Marine Insurance Company (“St. Paul”) insured Manzarek
only under a commercial general liability policy (“Manzarek
Policy”).
The Manzarek Policy was effective beginning on
May 24, 2002 but St. Paul did not issue it until October 3,
2002. From December 30, 2002 to December 30, 2003, St.
Paul insured Manzarek, DTI, and Robert Krieger1underanother commercial general liability policy (“DTI Policy”).
The DTI Policy was effective beginning on December 30,
2002, but St. Paul did not issue it until February 19, 2003. It
(1 The policy lists “Robbie Creeder” as an insured. This appears to be atypographical error as Robert Krieger is a founding member of The Doors and was part of Manzarek’s new band.
2976 MANZAREKv. ST. PAUL FIRE & MARINE INS. is not clear from our review of the record when St. Paul actually delivered copies of the Manzarek Policy or the DTI Policy to its insureds, though the complaint in this action alleges that St. Paul did not deliver the DTI Policy until sometime after February 28, 2003.
Among other things, both of the commercial general liability policies (“Policies”) insured against the occurrence of
“bodily injury,” “property damage,” “personal injury,” and
“advertising injury.” Manzarek and DTI argue, and St. Paul
concedes, that some of the alleged conduct falls within the
“advertising injury” portion of the Policies.
That portion of the Policies contains the following provisions: Advertising injury liability. We’ll pay amounts anyprotected person is legally required to pay as damages for covered advertising injury that:
• results from the advertising of your products,your work, or your completed work; and
• is caused by an advertising injury offense com-mitted while this agreement is in effect.Advertising injury offense means any of the following offenses:
• Libel, or slander, in or with covered material.
• Making known to any person or organizationcovered material that disparages the business, premises, products, services, work, or completed
work of others.
• Making known to any person or organizationcovered material that violates a person’s right of privacy. 2977 MANZAREK v. ST. PAUL FIRE & MARINE INS.
• Unauthorized use of any advertising idea or advertising material, or any slogan or title, of others in your advertising.
Advertising means attracting the attention of others
by any means for the purpose of:
• seeking customers or supporters; or
• increasing sales or business. Advertising idea means a manner or style of advertising that others use and intend to attract attention in their advertising. But we won’t consider information used to identify or record customers or supporters, such as a list of customers or supporters, to be an advertising idea. Advertising material means any covered material
that:
• is subject to copyright law; and
• others use and intend to attract attention in theiradvertising. Both Policies also contain a Field of Entertainment Limitation Endorsement (“FELE”) which “changes [the insured’s]
Commercial General Liability Protection” and “reduces cov-
erage.” In relevant part, the FELE “reduces coverage” as fol-
lows: Field of Entertainment.We won’t cover personalinjury or advertising injury that results from the content of, or the advertising or publicizing for, any Properties or Programs which are within your Field of Entertainment Business.
2978 MANZAREKv. ST. PAUL FIRE & MARINE INS.
Properties or Programs means any of your properties, products, programs, materials or other matter. Field of Entertainment Business includes the follow-
ing;
• The creation, production, publication, distribu-tion, exploitation, exhibition, advertising and publicizing of product or material in any and all media such as motion pictures of any kind and
character, television programs, commercials or
industrial or educational or training films, phono-
graph records, audio or video tapes, CDs or CD
ROMs, computer on-line services or internet or
Web site pages, cassettes or discs, electrical tran-
scriptions, music in sheet or other form, live per-
formance, books or other publications. • The ownership, operation, maintenance or use ofradio and television broadcasting stations. CATV systems, cinemas, stage productions with living actors, and any similar exhibition or broadcast
media.
• The ownership, operation maintenance or use ofmerchandising programs, advertising or publicity material, characters or ideas: whether or not on your premises or in your possession at the time of the alleged offense. As referenced above, both Policies also insured against theoccurrence of “bodily injury.” The Policies define “bodily injury” to mean “any physical harm, including sickness or disease, to the physical health of other persons.” The Policies include mental anguish, injury, or illness, and emotional distress in the definition of covered “bodily injuries.”
2979 MANZAREK v. ST. PAUL FIRE & MARINE INS.
C. The Instant Action On February 5, 2003, Manzarek and DTI notified St. Paul of the Densmore Lawsuit. St. Paul responded by letter on February 18, 2003. That letter notified Manzarek and DTI that, although St. Paul was still investigating coverage issues, its preliminarily determination was that the Policies did not cover the Densmore Lawsuit. According to the complaint, St. Paul delivered this letter before it issued the DTI Policy or deliv-
ered a copy of it to its insureds. St. Paul did not issue the DTI
Policy until February 19, 2003—nearly two weeks after Man-
zarek and DTI tendered a copy of the Densmore Lawsuit to
St. Paul. The complaint also alleges that St. Paul preliminarily
denied coverage before it considered the language contained
in either of the Policies. On March 5, 2003, St. Paul notified Manzarek and DTI thatboth Policies contained the FELE. St. Paul denied coverage and refused to defend the Densmore Lawsuit on that basis. On March 19, 2003, St. Paul reiterated the applicability of the FELE and notified Manzarek and DTI that the Policies did not obligate it to defend or indemnify the Densmore Lawsuit.
Thereafter, Manzarek and DTI tendered the Courson Lawsuit to St. Paul. On May 6, 2003, St. Paul advised its insureds
that the Policies did not provide coverage for the Courson
Lawsuit. St. Paul therefore denied coverage and declined to
defend the Courson Lawsuit based on its interpretation of the
FELE.
In the months that followed, Manzarek and DTI con-
tinued to demand a defense under the Policies and St. Paul
persisted in its refusal to defend or indemnify its insureds. Manzarek and DTI filed this coverage and bad faith lawsuitagainst St. Paul in Los Angeles Superior Court approximately two years later. On April 5, 2006, Manzarek and DTI voluntarily amended their complaint. The amended complaint contained claims against St. Paul for
(1) breach of contract;
(2) 2980 MANZAREK v. ST. PAUL FIRE & MARINE INS. breach of the implied covenant of good faith and fair dealing;
and
(3) declaratory relief. St. Paul removed the action to the United States DistrictCourt on April 6, 2006. On April 11, 2006, St. Paul filed a motion to dismiss the first amended complaint pursuant to
Rule 12(b)(6) of the Federal Rules of Civil Procedure. The
district court heard argument on St. Paul’s motion to dismiss
on May 15, 2006 and entered a two-line docket entry granting
the motion to dismiss that same day. The docket entry by the
district court states that “[t]he court GRANTS the motion.
Defendants shall submit a proposed order.”
On May 18, 2006, St. Paul provided the district court with a proposed order granting the motion to dismiss with prejudice. The district court signed St. Paul’s proposed order on May19, 2006. The clerk entered the order on May 22, 2006. That
order dismissed with prejudice Manzarek’s and DTI’s claims
for breach of contract and breach of the implied covenant of
good faith and fair dealing, holding that the FELE was con-
spicuous, plain, clear, and unambiguous. Consequently, the
district court held that St. Paul owed Manzarek and DTI no
duty to defend or indemnify against the claims in the Underly-
ing Lawsuits. Additionally, the district court found that
“mendment of Plaintiffs’ First Amended Complaint would
be futile because plaintiffs would be unable to allege facts that
would alter these strictly legal determinations.” Manzarek and DTI appeal the district court’s order grantingthe motion to dismiss. Manzarek and DTI contend that the district court erred by
(1) holding that no duty to defend existed under the Policies;
(2) dismissing their claim for breach of contract; and
(3) dismissing their claim for breach of the implied covenant of good faith and fair dealing. Alternatively, Manzarek and DTI argue that the district court should have allowed them the opportunity to amend their complaint to state a viable claim for relief against St. Paul.
2981 MANZAREK v. ST. PAUL FIRE & MARINE INS. Manzarek and DTI argue that the district court abused its discretion by not giving them a chance to amend.
II. Standard of ReviewWe review de novo the district court’s decision to grant St.Paul’s motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). See Outdoor Media Group, Inc. v. City of Beaumont, 506 F.3d 895, 899 (9th Cir. 2007) (internal citation
omitted). “When ruling on a motion to dismiss, we may ‘gen-
erally consider only allegations contained in the pleadings,
exhibits attached to the complaint, and matters properly sub-
ject to judicial notice.’ ” Id. at 899-900 (quoting Swartz v.
KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007)).
We accept factual allegations in the complaint as true and construe the pleadings in the light most favorable to the nonmoving party.
Id. at 900. We need not accept as true conclusory allegations
that are contradicted by documents referred to in the com-
plaint. Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136,
1139 (9th Cir. 2003) (internal citation omitted). “Denial of leave to amend is reviewed for an abuse of dis-cretion.” Gompper v. VISX, Inc., 298 F.3d 893, 898 (9th Cir. 2002). “ ‘Dismissal without leave to amend is improper unless it is clear, upon de novo review, that the complaint could not be saved by any amendment.’ ” Id. (quoting Polich v. Burlington N., Inc., 942 F.2d 1467, 1472 (9th Cir. 1991)).
III. Discussion In this diversity case, we must apply California law wheninterpreting the Policies. See Aetna Cas. & Sur. Co., Inc. v. Centennial Ins. Co., 838 F.2d 346, 350 (9th Cir. 1988). Inter- pretation of insurance contracts under California law requires us to employ general principles of contract interpretation. MacKinnon v. Truck Ins. Exch., 73 P.3d 1205, 1212 (Cal. 2003); Safeco Ins. Co. of Am. v. Robert S., 28 P.3d 889, 893
(Cal. 2001). Under California law, we are to give effect to the
2982 MANZAREKv. ST. PAUL FIRE & MARINE INS.“mutual intention of the parties at the time the contract is formed.” MacKinnon, 73 P.3d at 1213; see Cal. Civ. Code § 1636. Clear, explicit, and unambiguous contractual language gov-erns. See Boghos v. Certain Underwriters at Lloyd’s of London, 115 P.3d 68, 71 (Cal. 2005); Cal. Civ. Code § 1638. In the event of an ambiguity, we must interpret contractual terms to “protect the objectively reasonable expectations of the insured.” Boghos, 115 P.3d at 71 (internal quotation marks and citations omitted). “Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer.” Id. A. Breach of ContractManzarek and DTI assert that the district court erred by dis-missing their claim for breach of contract with prejudice because the allegations in the Underlying Lawsuits triggered a contractual duty to defend. For the reasons set forth below, we agree.
1. Applicable Law a. Scope of Duty to Defend [1]Under California law, an insurer must defend its insured“if the underlying complaint alleges the insured’s liability for damages potentially covered under the policy, or if the complaint might be amended to give rise to a liability that would be covered under the policy.” Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1160 (Cal. 1993) (citation omitted). The duty to defend is broader than the duty to indemnify. Id. at 1157. Even if no damages are awarded, the duty to defend may still exist. Id. “ ‘The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy.’ ” Id. (quoting Horace Mann Ins. Co.
2983 MANZAREK v. ST. PAUL FIRE & MARINE INS.v. Barbara B., 846 P.2d 792, 795 (Cal. 1993)). “Any doubt as
to whether the facts establish the existence of the defense duty
must be resolved in the insured’s favor.” Montrose Chem.
Corp., 861 P.2d at 1160. If any of the claims in the underlying
complaint are covered, the insurer has a duty to defend the
entire action. Horace Mann Ins. Co., 846 P.2d at 797-98. The
court may consider facts outside the complaint “ ‘when they
reveal a possibility that the claim may be covered by the poli-
cy.’ ” Id. at 795. b. Enforceability of Coverage Limitations
[2]“nsurance coverage is interpreted broadly so as toafford the greatest possible protection to the insured,
[whereas] exclusionary clauses are interpreted narrowly
against the insurer.” MacKinnon, 73 P.3d at 1213 (internal
quotation marks and citation omitted) (bracketed text in origi-
nal); see Mariscal v. Old Republic Life Ins. Co., 50 Cal. Rptr.
2d 224, 227 (Cal. Ct. App. 1996) (recognizing that “exclu-
sions are strictly interpreted against the insurer”). An “exclu-
sionary clause must be conspicuous, plain and clear.”
Mackinnon, 73 P.3d at 1213 (internal quotation marks and
citation omitted). “This rule applies with particular force
when the coverage portion of the insurance policy would lead
an insured to reasonably expect coverage for the claim pur-
portedly excluded.” Id. “The burden is on the insured to estab-
lish that the claim is within the basic scope of coverage and
on the insurer to establish that the claim is specifically exclud-
ed.” Id. “Coverage may be limited by a valid endorsement
and, if a conflict exists between the main body of the policy
and an endorsement, the endorsement prevails.” Haynes v.
Farmers Ins. Exch., 89 P.3d 381, 385 (Cal. 2004). 2. Analysis The district court signed and entered St. Paul’s proposedorder granting St. Paul’s motion to dismiss the claim for
breach of contract.
The order states that “[t]he FELE was
2984 MANZAREK v. ST. PAUL FIRE & MARINE INS. sufficiently conspicuous” and notes that “n addition to being conspicuously referenced in the policy declarations and attached as a separate endorsement, the language of the FELE [was] plain and clear.” The district court then concluded that based on the plain and clear language of the FELE, it was reasonable for St. Paul to believe its insureds understood the limiting effect of the FELE on advertising injury coverage under the Policies. Based on that conclusion, the district court dismissed the breach of contract claim with prejudice.
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
RAYMOND MANZAREK; DOORS TOURING, INC., a California corporation, No. 06-55936
Plaintiffs-Appellants, D.C. No.v. CV-06-02082-RST. PAUL FIRE & MARINE OPINION INSURANCECOMPANY, a Minnesota corporation, Defendant-Appellee.
Appeal from the United States District Courtfor the Central District of California
Manuel L. Real, District Judge, PresidingArgued and
SubmittedFebruary 11, 2008—Pasadena, California
Filed March 25, 2008
Before: Alfred T. Goodwin, Betty B. Fletcher, andN. Randy Smith,
Circuit Judges.Opinion by Judge N.R. Smith
2971 COUNSEL
Kirk A. Pasich, Esq., Dickstein Shapiro LLP, Los Angeles,
California,
for the plaintiffs-appellants. Andrew R. McCloskey, Esq., Riedl,
McCloskey & Waring LLP, San Diego, California, for the defendant-appellee.
OPINION N. R. Smith, Circuit Judge:
We hold that the district court erred by dismissing Raymond Manzarek’s and Doors Touring, Inc.’s (“DTI”)
amended complaint because the underlying complaints raised
at least the potential for coverage under the operative insur-
ance policies. We further hold that the district court abused its
discretion by not giving Manzarek and DTI an opportunity to
amend their complaint. We have jurisdiction under 28 U.S.C.
§ 1291.
We reverse and remand for further proceedings.
I. Background
A. Underlying Lawsuits This insurance coverage and bad faith lawsuit arose out oftwo lawsuits (“Underlying Lawsuits”) filed in California state court against Manzarek (a founding member of the classic rock group The Doors), DTI, and the other members of Manzarek’s band at the time of the filing of the lawsuits.
John Densmore (the former drummer for The Doors) filed one of
the Underlying Lawsuits (“Densmore Lawsuit”). The parents
of Jim Morrison (the former vocalist for The Doors) and the
parents of Pamela Courson (Morrison’s late wife) together
filed the other underlying lawsuit (“Courson Lawsuit”).
Both Underlying Lawsuits alleged that Manzarek and members of 2975 MANZAREK v. ST. PAUL FIRE & MARINE INS. his band were liable for infringing on The Doors name, trade- mark, and logo in conjunction with their planned national and international tours. Both Underlying Lawsuits included alle- gations against Manzarek and DTI for the improper use of The Doors logo in conjunction with the marketing of products and merchandise. Additionally, the Densmore Lawsuit alleged that the breaches by Manzarek and his band caused Densmore to suffer economic damages as well as damage to his “reputation and stature by causing people to believe that he was not, and is not, an integral and respected part of The Doors band, or is one member who easily can be replaced by another drummer.” The state trial court consolidated the Underlying Lawsuitsfor trial but reserved some equitable claims for determination by the court. At trial, the jury found Manzarek and the other defendants liable on some claims but awarded no damages.
The record before us is not clear what result the state trial
court reached on the equitable claims that it removed from the
jury’s consideration. Manzarek’s and DTI’s defense fees and
costs in the Underlying Lawsuits exceeded $3 million.
B. The Policies
From May 24, 2002 to May 24, 2003, St. Paul Fire & Marine Insurance Company (“St. Paul”) insured Manzarek
only under a commercial general liability policy (“Manzarek
Policy”).
The Manzarek Policy was effective beginning on
May 24, 2002 but St. Paul did not issue it until October 3,
2002. From December 30, 2002 to December 30, 2003, St.
Paul insured Manzarek, DTI, and Robert Krieger1underanother commercial general liability policy (“DTI Policy”).
The DTI Policy was effective beginning on December 30,
2002, but St. Paul did not issue it until February 19, 2003. It
(1 The policy lists “Robbie Creeder” as an insured. This appears to be atypographical error as Robert Krieger is a founding member of The Doors and was part of Manzarek’s new band.
2976 MANZAREKv. ST. PAUL FIRE & MARINE INS. is not clear from our review of the record when St. Paul actually delivered copies of the Manzarek Policy or the DTI Policy to its insureds, though the complaint in this action alleges that St. Paul did not deliver the DTI Policy until sometime after February 28, 2003.
Among other things, both of the commercial general liability policies (“Policies”) insured against the occurrence of
“bodily injury,” “property damage,” “personal injury,” and
“advertising injury.” Manzarek and DTI argue, and St. Paul
concedes, that some of the alleged conduct falls within the
“advertising injury” portion of the Policies.
That portion of the Policies contains the following provisions: Advertising injury liability. We’ll pay amounts anyprotected person is legally required to pay as damages for covered advertising injury that:
• results from the advertising of your products,your work, or your completed work; and
• is caused by an advertising injury offense com-mitted while this agreement is in effect.Advertising injury offense means any of the following offenses:
• Libel, or slander, in or with covered material.
• Making known to any person or organizationcovered material that disparages the business, premises, products, services, work, or completed
work of others.
• Making known to any person or organizationcovered material that violates a person’s right of privacy. 2977 MANZAREK v. ST. PAUL FIRE & MARINE INS.
• Unauthorized use of any advertising idea or advertising material, or any slogan or title, of others in your advertising.
Advertising means attracting the attention of others
by any means for the purpose of:
• seeking customers or supporters; or
• increasing sales or business. Advertising idea means a manner or style of advertising that others use and intend to attract attention in their advertising. But we won’t consider information used to identify or record customers or supporters, such as a list of customers or supporters, to be an advertising idea. Advertising material means any covered material
that:
• is subject to copyright law; and
• others use and intend to attract attention in theiradvertising. Both Policies also contain a Field of Entertainment Limitation Endorsement (“FELE”) which “changes [the insured’s]
Commercial General Liability Protection” and “reduces cov-
erage.” In relevant part, the FELE “reduces coverage” as fol-
lows: Field of Entertainment.We won’t cover personalinjury or advertising injury that results from the content of, or the advertising or publicizing for, any Properties or Programs which are within your Field of Entertainment Business.
2978 MANZAREKv. ST. PAUL FIRE & MARINE INS.
Properties or Programs means any of your properties, products, programs, materials or other matter. Field of Entertainment Business includes the follow-
ing;
• The creation, production, publication, distribu-tion, exploitation, exhibition, advertising and publicizing of product or material in any and all media such as motion pictures of any kind and
character, television programs, commercials or
industrial or educational or training films, phono-
graph records, audio or video tapes, CDs or CD
ROMs, computer on-line services or internet or
Web site pages, cassettes or discs, electrical tran-
scriptions, music in sheet or other form, live per-
formance, books or other publications. • The ownership, operation, maintenance or use ofradio and television broadcasting stations. CATV systems, cinemas, stage productions with living actors, and any similar exhibition or broadcast
media.
• The ownership, operation maintenance or use ofmerchandising programs, advertising or publicity material, characters or ideas: whether or not on your premises or in your possession at the time of the alleged offense. As referenced above, both Policies also insured against theoccurrence of “bodily injury.” The Policies define “bodily injury” to mean “any physical harm, including sickness or disease, to the physical health of other persons.” The Policies include mental anguish, injury, or illness, and emotional distress in the definition of covered “bodily injuries.”
2979 MANZAREK v. ST. PAUL FIRE & MARINE INS.
C. The Instant Action On February 5, 2003, Manzarek and DTI notified St. Paul of the Densmore Lawsuit. St. Paul responded by letter on February 18, 2003. That letter notified Manzarek and DTI that, although St. Paul was still investigating coverage issues, its preliminarily determination was that the Policies did not cover the Densmore Lawsuit. According to the complaint, St. Paul delivered this letter before it issued the DTI Policy or deliv-
ered a copy of it to its insureds. St. Paul did not issue the DTI
Policy until February 19, 2003—nearly two weeks after Man-
zarek and DTI tendered a copy of the Densmore Lawsuit to
St. Paul. The complaint also alleges that St. Paul preliminarily
denied coverage before it considered the language contained
in either of the Policies. On March 5, 2003, St. Paul notified Manzarek and DTI thatboth Policies contained the FELE. St. Paul denied coverage and refused to defend the Densmore Lawsuit on that basis. On March 19, 2003, St. Paul reiterated the applicability of the FELE and notified Manzarek and DTI that the Policies did not obligate it to defend or indemnify the Densmore Lawsuit.
Thereafter, Manzarek and DTI tendered the Courson Lawsuit to St. Paul. On May 6, 2003, St. Paul advised its insureds
that the Policies did not provide coverage for the Courson
Lawsuit. St. Paul therefore denied coverage and declined to
defend the Courson Lawsuit based on its interpretation of the
FELE.
In the months that followed, Manzarek and DTI con-
tinued to demand a defense under the Policies and St. Paul
persisted in its refusal to defend or indemnify its insureds. Manzarek and DTI filed this coverage and bad faith lawsuitagainst St. Paul in Los Angeles Superior Court approximately two years later. On April 5, 2006, Manzarek and DTI voluntarily amended their complaint. The amended complaint contained claims against St. Paul for
(1) breach of contract;
(2) 2980 MANZAREK v. ST. PAUL FIRE & MARINE INS. breach of the implied covenant of good faith and fair dealing;
and
(3) declaratory relief. St. Paul removed the action to the United States DistrictCourt on April 6, 2006. On April 11, 2006, St. Paul filed a motion to dismiss the first amended complaint pursuant to
Rule 12(b)(6) of the Federal Rules of Civil Procedure. The
district court heard argument on St. Paul’s motion to dismiss
on May 15, 2006 and entered a two-line docket entry granting
the motion to dismiss that same day. The docket entry by the
district court states that “[t]he court GRANTS the motion.
Defendants shall submit a proposed order.”
On May 18, 2006, St. Paul provided the district court with a proposed order granting the motion to dismiss with prejudice. The district court signed St. Paul’s proposed order on May19, 2006. The clerk entered the order on May 22, 2006. That
order dismissed with prejudice Manzarek’s and DTI’s claims
for breach of contract and breach of the implied covenant of
good faith and fair dealing, holding that the FELE was con-
spicuous, plain, clear, and unambiguous. Consequently, the
district court held that St. Paul owed Manzarek and DTI no
duty to defend or indemnify against the claims in the Underly-
ing Lawsuits. Additionally, the district court found that
“mendment of Plaintiffs’ First Amended Complaint would
be futile because plaintiffs would be unable to allege facts that
would alter these strictly legal determinations.” Manzarek and DTI appeal the district court’s order grantingthe motion to dismiss. Manzarek and DTI contend that the district court erred by
(1) holding that no duty to defend existed under the Policies;
(2) dismissing their claim for breach of contract; and
(3) dismissing their claim for breach of the implied covenant of good faith and fair dealing. Alternatively, Manzarek and DTI argue that the district court should have allowed them the opportunity to amend their complaint to state a viable claim for relief against St. Paul.
2981 MANZAREK v. ST. PAUL FIRE & MARINE INS. Manzarek and DTI argue that the district court abused its discretion by not giving them a chance to amend.
II. Standard of ReviewWe review de novo the district court’s decision to grant St.Paul’s motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). See Outdoor Media Group, Inc. v. City of Beaumont, 506 F.3d 895, 899 (9th Cir. 2007) (internal citation
omitted). “When ruling on a motion to dismiss, we may ‘gen-
erally consider only allegations contained in the pleadings,
exhibits attached to the complaint, and matters properly sub-
ject to judicial notice.’ ” Id. at 899-900 (quoting Swartz v.
KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007)).
We accept factual allegations in the complaint as true and construe the pleadings in the light most favorable to the nonmoving party.
Id. at 900. We need not accept as true conclusory allegations
that are contradicted by documents referred to in the com-
plaint. Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136,
1139 (9th Cir. 2003) (internal citation omitted). “Denial of leave to amend is reviewed for an abuse of dis-cretion.” Gompper v. VISX, Inc., 298 F.3d 893, 898 (9th Cir. 2002). “ ‘Dismissal without leave to amend is improper unless it is clear, upon de novo review, that the complaint could not be saved by any amendment.’ ” Id. (quoting Polich v. Burlington N., Inc., 942 F.2d 1467, 1472 (9th Cir. 1991)).
III. Discussion In this diversity case, we must apply California law wheninterpreting the Policies. See Aetna Cas. & Sur. Co., Inc. v. Centennial Ins. Co., 838 F.2d 346, 350 (9th Cir. 1988). Inter- pretation of insurance contracts under California law requires us to employ general principles of contract interpretation. MacKinnon v. Truck Ins. Exch., 73 P.3d 1205, 1212 (Cal. 2003); Safeco Ins. Co. of Am. v. Robert S., 28 P.3d 889, 893
(Cal. 2001). Under California law, we are to give effect to the
2982 MANZAREKv. ST. PAUL FIRE & MARINE INS.“mutual intention of the parties at the time the contract is formed.” MacKinnon, 73 P.3d at 1213; see Cal. Civ. Code § 1636. Clear, explicit, and unambiguous contractual language gov-erns. See Boghos v. Certain Underwriters at Lloyd’s of London, 115 P.3d 68, 71 (Cal. 2005); Cal. Civ. Code § 1638. In the event of an ambiguity, we must interpret contractual terms to “protect the objectively reasonable expectations of the insured.” Boghos, 115 P.3d at 71 (internal quotation marks and citations omitted). “Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer.” Id. A. Breach of ContractManzarek and DTI assert that the district court erred by dis-missing their claim for breach of contract with prejudice because the allegations in the Underlying Lawsuits triggered a contractual duty to defend. For the reasons set forth below, we agree.
1. Applicable Law a. Scope of Duty to Defend [1]Under California law, an insurer must defend its insured“if the underlying complaint alleges the insured’s liability for damages potentially covered under the policy, or if the complaint might be amended to give rise to a liability that would be covered under the policy.” Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1160 (Cal. 1993) (citation omitted). The duty to defend is broader than the duty to indemnify. Id. at 1157. Even if no damages are awarded, the duty to defend may still exist. Id. “ ‘The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy.’ ” Id. (quoting Horace Mann Ins. Co.
2983 MANZAREK v. ST. PAUL FIRE & MARINE INS.v. Barbara B., 846 P.2d 792, 795 (Cal. 1993)). “Any doubt as
to whether the facts establish the existence of the defense duty
must be resolved in the insured’s favor.” Montrose Chem.
Corp., 861 P.2d at 1160. If any of the claims in the underlying
complaint are covered, the insurer has a duty to defend the
entire action. Horace Mann Ins. Co., 846 P.2d at 797-98. The
court may consider facts outside the complaint “ ‘when they
reveal a possibility that the claim may be covered by the poli-
cy.’ ” Id. at 795. b. Enforceability of Coverage Limitations
[2]“nsurance coverage is interpreted broadly so as toafford the greatest possible protection to the insured,
[whereas] exclusionary clauses are interpreted narrowly
against the insurer.” MacKinnon, 73 P.3d at 1213 (internal
quotation marks and citation omitted) (bracketed text in origi-
nal); see Mariscal v. Old Republic Life Ins. Co., 50 Cal. Rptr.
2d 224, 227 (Cal. Ct. App. 1996) (recognizing that “exclu-
sions are strictly interpreted against the insurer”). An “exclu-
sionary clause must be conspicuous, plain and clear.”
Mackinnon, 73 P.3d at 1213 (internal quotation marks and
citation omitted). “This rule applies with particular force
when the coverage portion of the insurance policy would lead
an insured to reasonably expect coverage for the claim pur-
portedly excluded.” Id. “The burden is on the insured to estab-
lish that the claim is within the basic scope of coverage and
on the insurer to establish that the claim is specifically exclud-
ed.” Id. “Coverage may be limited by a valid endorsement
and, if a conflict exists between the main body of the policy
and an endorsement, the endorsement prevails.” Haynes v.
Farmers Ins. Exch., 89 P.3d 381, 385 (Cal. 2004). 2. Analysis The district court signed and entered St. Paul’s proposedorder granting St. Paul’s motion to dismiss the claim for
breach of contract.
The order states that “[t]he FELE was
2984 MANZAREK v. ST. PAUL FIRE & MARINE INS. sufficiently conspicuous” and notes that “n addition to being conspicuously referenced in the policy declarations and attached as a separate endorsement, the language of the FELE [was] plain and clear.” The district court then concluded that based on the plain and clear language of the FELE, it was reasonable for St. Paul to believe its insureds understood the limiting effect of the FELE on advertising injury coverage under the Policies. Based on that conclusion, the district court dismissed the breach of contract claim with prejudice.