Policy's Severability Clause Renders Intentional Acts Exclusion That Applied to "An" Insured Ambiguous

Posted on June 23, 2010 by Sara Thorpe

The California Supreme Court had before it the following certified question from the Ninth Circuit:

Where a contract of liability insurance covering multiple insureds contains a severability clause, does an exclusion barring coverage for injuries arising out of the intentional acts of “an insured” bar coverage for claims that one insured negligently failed to prevent the intentional acts of another insured?

Prior to this decision, there was not clarity in California as to how the courts would rule on this issue and, as that court notes in its opinion, there is divergent positions on this issue around the country.

In Minkler v. Safeco Ins. Co., __ F.3d __ (9th Cir. 2010) (10 CDOS 7612), the court found, in the specific context before it, that the intentional acts exclusion was ambiguous in light of the policy’s severability-of-interests clause. This particular severability clause provided that: “This insurance applies separately to each insured. This condition will not increase our limit of liability for any one occurrence.” The court read the clause to pertain to all “insurance” and not just the policy’s limits.

The context was that Betty Schwartz, the insured, and her son David Schwartz, also an insured as a relative resident of the policyholder's household under Betty’s homeowners’ policy, were sued by Scott Minkler. Minkler alleged David, Minkler’s little league coach, sexually molested David over several years. Minkler asserted multiple causes of action against David, including sexual battery, intentional infliction of emotional distress, negligence, and negligence per se. Minkler also asserted a single cause of action for negligent supervision against Betty.  Minkler alleged David molested Minkler in Betty's home, Betty knew her son was molesting Minkler, but Betty nonetheless failed to take reasonable steps to stop her son from doing so.

The homeowners’ policies over the pertinent years contained an intentional acts exclusion that provided: “Personal Liability [coverage] ... do[es] not apply to bodily injury or property damage: (a) which is expected or intended by an insured or which is the foreseeable result of an act or omission intended by an insured... .”  (There was no sexual molestation exclusion in the policies.) The court noted that “an” insured means more than the insured seeking coverage. However, Minkler contended the severability clause rendered the intentional acts exclusion ineffective where there was a claim one particular insured was liable for negligent supervision of another insured, and not just variously or derivatively liable for that other insured’s conduct.

Because the court found the severability clause applied to the entire policy and not just the limits of liability, the court found the intentional acts exclusion ambiguous.  Under California law, if the terms and conditions of a policy are ambiguous, then the ambiguity must be resolved in a way that preserves the insured’s reasonable expectations.  Here, the court concluded Betty’s reasonable expectation was that the policy would cover her separately for her independent acts or omissions as long as her own conduct did not fall within the intentional acts exclusion.  Therefore, coverage was not excluded by the intentional acts exclusion.  

The court noted the majority of other states have found similar severability clauses apply only to policy limits.  The court also “stressed” that their reasoning and conclusion was based on the specific circumstances and policy language before the court.

 

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California Court: Insurer Objectively Reasonable in Reversing Course on Coverage Where No Clear Precedent and Insured Not Damaged

Posted on September 8, 2009 by Sara Thorpe

California appellate court opinions on insurance coverage matters are very often lengthy, but rarely entertaining.  Here is a long but well-written one that it is not only intellectually well-done, but humorous in the delivery. And, the result was for the insurer.

In Griffin Dewatering Corp. v. Northern Ins. Co. of N.Y. (2009) 176 Cal.App.4th 172 (2009 WL 2344762), the California Court of Appeal, Fourth Appellate District, reversed the trial court’s $10 million judgment of attorneys fees and punitive damages against the insurer. The court concluded the insurer breached its duty to defend; however, the insurer acted reasonably in, after denying any duty, defending and paying the claim, all while the law was in flux as to application of the policy’s “Total Pollution Exclusion.”  The court found the insurer’s conduct was objectively reasonable under the circumstances. The decision demonstrates an insurer can reconsider and, in doing so, avoid being found in bad faith. 

Procedurally the case is also interesting, not only in its convoluted and extensive history, but in that the Court in denying a petition for rehearing issued a supplemental (unpublished) opinion directly addressing the additional “facts” and arguments raised by the insured. See 2009 WL 2659463. There is much that could be discussed about the case, but only a short synopsis is provided here.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.
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