St. Paul Mercury Insurance Company, Cross-Appellant v. Ralee Engineering Company, a Corporation, Cross-Appellees

This is a declaratory judgment action by an insurer, St. Paul Mercury Insurance Company, against an insured, Ralee Engineering Company. Ralee appeals the order of the district court granting St. Paul’s motion for summary judgment on the issue of policy coverage. St. Paul cross-appeals the portion of the district court’s judgment that denied St. Paul reimbursement for the costs expended on behalf of Ralee prior to St. Paul’s determination that it had no duty to defend.

In 1983, a former Ralee employee, Frederico Torres, brought an action against Ralee in California Superior Court alleging wrongful termination of his employment contract and intentional infliction of emotional distress. Torres and his wife had cancer and collected benefits through Ra-lee’s group insurance plan. The complaint alleged that after Torres returned to work, Ralee maliciously and willfully harassed Torres and made him work long hours in an attempt to cause him to resign.

Ralee was insured under a policy issued by St. Paul. Ralee requested that St. Paul defend it in the Torres action. St. Paul originally agreed to do so, but reserved its right to assert noncoverage at a later time. It stated in a letter to…