California Courts Issue Two Significant Coverage Decisions
By Samuel H. Ruby
, Andrew B. Downs
1. CALIFORNIA SUPREME COURT HOLDS SEVERABILITY OF INTERESTS CONDITION MEANS EXCLUSION FOR INTENTIONAL ACT OF "AN INSURED" DOES NOT APPLY TO NEGLIGENT CO-INSURED
2. CALIFORNIA COURT OF APPEAL HOLDS UMBRELLA INSURER HAS FIRST-DOLLAR DUTY TO DEFEND WHEN POLICY DOES NOT EXPRESSLY CONDITION DEFENSE ON EXHAUSTION OF SELF-INSURED RETENTION
Last week, the California courts once again reminded us that coverage decisions turn on individual policy language, not broad statements of principle.
First, in a potentially far reaching opinion, the California Supreme Court concluded that a policy's severability of interests clause prevents an exclusion for the intentional acts of "an" or "any" insured from applying to an insured who, while not engaging in intentional conduct, was nevertheless liable for negligent supervision of an insured who did engage in excluded intentional conduct.
Minkler v. Safeco Ins. Co. of America involved the sexual molestation of a minor. The adult molester was an insured under a homeowners policy issued to his mother. All parties agreed that the adult molester's liability was excluded by an exclusion for bodily injury or property damage "...which is expected or intended by an insured or which is the foreseeable result of an act or omission intended by an insured." The coverage issue involved his mother, who was sued for negligent supervision for failing to prevent the molestation, some of which occurred in her home. Safeco argued that the use of "an insured" meant that the intentional conduct of the son also applied to the mother's liability.
The policy's Conditions section also contained a severability of interests clause which provided "...this policy applies separately to each insured." The California Supreme Court held that the presence of the severability clause created an ambiguity because it could be read to apply only to the policy's limits of liability, or to the policy's coverage and exclusions as well. In this instance, the Supreme Court concluded that the severability clause meant that the intentional conduct of the son, while precluding any coverage he might have had, did not affect the coverage available to his mother.
In reaching this conclusion, the California Supreme Court was careful to explain what it was not holding: (a) It was not addressing the situation where one insured is vicariously liable for the intentional conduct of another; and (b) It was not addressing other uses of the "an insured" phraseology in the policies, such as in exclusions for an entire category of risk (such as insured vs. insured exclusions or those for use of vehicles, aircraft and vessels). In a footnote, the court explained "Application of a severability clause can never result in a finding of coverage the insured had no objective reason to expect. Thus, each exclusion applicable to "an" or "any" insured must be examined individually, and in context to determine the effect a severability clause like the one at issue here might have on its operation." At another point, the court explained "...we must interpret the policies as we find them..."
Despite the Supreme Court's attempt to limit its holding to the intentional conduct exclusion in a liability policy, insurers can expect that policyholders will seek to apply it in other contexts. The court's discussion of the need to examine each contract individually in the context of a particular claim reminds us that the answer to any coverage question must begin with, "It depends on the language of the policy."
In other news, a California Court of Appeal has found that an umbrella insurer has a first-dollar duty to defend, irrespective of a retained limit (self-insured retention), where the policy does not expressly condition the defense obligation upon exhaustion of the retention.
In Legacy Vulcan Corp. v. Superior Court (Transport Ins. Co.),, a city sued the insured (Vulcan) over alleged environmental contamination from use of Vulcan's chemical product by the dry cleaning industry. Vulcan defended itself and settled the case, after no insurer provided it with a defense. Vulcan then sued its insurers, including Transport, which had issued an Excess Catastrophe Liability Policy. The policy provided a mixture of excess and umbrella indemnity coverage. Similarly, the policy provided defense coverage where either (a) the injuries were "not within the terms of the coverage of underlying insurance but within the terms of coverage of this insurance;" or (b) if limits of liability of the underlying insurance are exhausted..."
The court interpreted the first duty-to-defend provision as an umbrella duty and the second provision as an excess duty. Further interpreting the umbrella defense duty, the court held that it could be triggered by a mere potential for coverage; that "underlying insurance" meant only underlying insurance scheduled in the policy; and that in contradistinction to the second (excess) defense provision, the umbrella provision did not require exhaustion of any underlying insurance.
Turning to whether the umbrella provision required exhaustion of the retained limit set forth in the Vulcan policy, the court said "no." Noting that the umbrella indemnity coverage was expressly tied to "ultimate net loss in excess of the retained limit" but that the umbrella defense provision did not reference the retained limit, the court interpreted the policy as providing first-dollar defense where there was a potential for umbrella coverage. The court distinguished prior California cases, applying retentions to defense costs, based on the different wording of the policies at issue in those cases.