Metropolitan News-Enterprise


Wednesday, June 21, 2017


Page 1


Ninth Circuit Declares:

‘Direct Supplier’ Might Include Indirect Supplier

Interpreting an Insurance Contract, Panel Says Trade Usage Might Differ From Ordinary Usage


By a MetNews Staff Writer


The Ninth U.S. Circuit Court of Appeals has held that the term “direct supplier” in an insurance contract might include suppliers that do not sell goods directly to the insured.

The memorandum opinion, filed Monday, reverses a summary judgment awarded by Judge Dean D. Pregerson of the Central District of California to Factory Mutual Insurance Company. It orders trial of the action by DIRECTV under its policy insuring against losses from business disruptions, including those of a “direct supplier.”

The insured, a broadcast satellite service provider, had been harmed by delays in its receipt of set top boxes, devices which its customers need to receive programs on their television sets. The delays were caused by monsoons in northern Thailand which did damage in 2011 to two facilities of Western Digital, a manufacturer of hard drives.

That company did not sell its product to DIRECTV; rather, it sold hard drives to unrelated companies that manufacture the set top boxes which those companies sell to DIRECTV.

A three-judge panel—comprised of Ninth Circuits Judges Susan P. Graber and Mary H. Murguia, along with Susan R. Bolton, a judge the District of Arizona, sitting on assignment—acknowledged that the “plain and ordinary meaning of the phrase ‘direct supplier’ does not include Western Digital.”

Extrinsic Evidence

However, the opinion says, “[i]n light of the extrinsic evidence of trade usage introduced by Plaintiff, the phrase ‘direct supplier’ is ‘reasonably susceptible’ to the meaning urged by Plaintiff.”

For that proposition, it cited the California Court of Appeal’s 2004 decision in Wolf v. Superior Court. There, Div. Seven of this district quoted two earlier opinions as saying that “[e]ven if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible,” and it is reversible error for a judge to refuse to consider such evidence.

Monday’s decision quotes a 1916 Indiana opinion as saying:

“The law charges insurance companies with the duty of informing themselves as to the usages of the particular business insured, and a knowledge of such usage on the part of such company will be presumed.”

Judges Make Prediction

The judges offered a “prediction” that the California Supreme Court will come to express its agreement with that proposition, noting:

“We base that prediction on the law of other jurisdictions, a leading insurance law treatise,… and the California Court of Appeal’s decision in Geddes v. Tri-State Insurance Co…..

That 1968 decision dealt with a liability insurance policy issued to a psychiatrist. At issue was whether a particular conversation constituted a “consultation,” which would be covered by the policy.

The Court of Appeal said:

“Applicable to the situation at hand is the rationale of the rule that the meaning of language in a contract involving a particular trade is determined by the trade use of that language.”

The Ninth Circuit on Monday cited its 1997 decision in Astaire v. Best Film & Video Corp. as saying:

“In the absence of a California Supreme Court decision, we must predict how the California Supreme Court would decide [an] issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises and restatements as guidance.”

The opinion, in DIRECTV v. Factory Mutual Insurance Co., 16-55313, declares:

“Whether the phrase ‘direct supplier’ was intended in a trade usage sense and, if so, whether Western Digital falls within the trade usage definition are questions of fact to be resolved by a jury.”


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