News - August 2007

• No UM Benefits Due When Vehicle Owner and Operator are Covered by Personal Umbrella Policy
• Policy Issued in Texas But to Be Performed in California Must Be Interpreted Under California Law; Duty to Defend Found
• Foreclosures: Lender Insurance Claims Require Understanding of “Credit Bid” Rules

< Return to News page

Top of Page

No UM Benefits Due When Vehicle Owner and Operator are Covered by Personal Umbrella Policy

The California Court of Appeal has held that a vehicle is not “uninsured” where a personal umbrella policy provides bodily injury liability coverage to the owner and operator of an otherwise uninsured motor vehicle. (California Capital Insurance Company v. Nielsen (2007) WL 2181499)

Facts

Carla Brown owned a vehicle which she loaned to her son, Bryan Jones.  Jones drove the vehicle while intoxicated and with a suspended license. When Jones lost control of the vehicle and crashed into a pole, Douglas Nielsen, a passenger, was thrown from the car and rendered a quadriplegic.

At the time of the accident, the vehicle was not covered by any auto liability insurance policy. However, Brown had a $1 million personal liability umbrella policy with State Farm which provided coverage for both Jones and Brown. State Farm paid Nielsen $1 million in settlement of Nielsen’s action against Jones and Brown.

At the time of the accident, Nielsen’s father had an auto liability policy issued by California Capital Insurance Company (CCIC). The CCIC policy provided uninsured motorist coverage of $100,000 to family members, and defined an “uninsured motor vehicle” as one “[t]o which no bodily injury liability bond or policy applies at the time of the accident.” 

Nielsen made a claim CCIC. However, CCIC declined to provide uninsured motorist benefits to Nielsen, asserting that the vehicle Jones owned and Brown operated was not an “uninsured motor vehicle” in light of the State Farm personal liability umbrella policy. CCIC filed then a declaratory relief action against Nielsen. The trial court ruled that the vehicle that Jones owned and Brown operated was not an “uninsured motor vehicle,” and Nielsen appealed. 

Holding

The Court of Appeal affirmed, holding that where alleged tortfeasors have bodily injury liability insurance applicable to cover their liabilities pursuant to a personal umbrella policy, a vehicle is not an “uninsured motor vehicle” and an injured person is not entitled to uninsured motorist benefits. CCIC’s policy defined an “uninsured motor vehicle” as one “[t]o which no bodily injury liability bond or policy applies at the time of the accident,” and this definition was substantially similar to the definition of “uninsured motor vehicle” contained in Insurance Code section 11580.2 (b).

Comment

This case illustrates that when a person injured in an automobile accident recovers against an owner’s or operator’s liability policy—even if the policy is not an auto liability policy—the involved vehicle cannot be considered an “uninsured motor vehicle.”

Top of Page

Policy Issued in Texas But to Be Performed in California Must Be Interpreted Under California Law; Duty to Defend Found

The California Court of Appeal has held that (1) a general liability policy which was issued to an insured in Texas but which was to be performed in California should be interpreted under the laws of California, and (2) interpreting the policy under California law, the insured was entitled to a defense from the insurer. (Frontier Oil Corporation v. RLI Insurance Company (2007) 63 Cal.Rptr.3d 816)

Facts

The predecessor of Frontier Oil Corporation (Frontier) was an oil and gas company based in Texas with some operations in California. Frontier purchased a general liability policy from a Texas insurer which was later acquired by RLI Insurance Company (RLI). 

The policy’s main coverage form provided that RLI would indemnify and defend Frontier against suits alleging bodily injury or property damage, but contained an “absolute” pollution exclusion. However, the policy also contained a “pollution liability endorsement” which deleted the absolute pollution exclusion and added indemnity coverage for damages arising from “sudden and accidental” releases of pollutants, without mentioning whether there was a duty to defend suits seeking such damages. The policy included a “Texas Changes” endorsement which made the policy conform to Texas law regarding notice of claims, policy cancellation and policy renewal. The policy also included some endorsements listing various California public entities as “additional insureds” with respect to Frontier’s oil operations in Beverly Hills, California. 

Between 2003 and 2005, various plaintiffs sued Frontier in California. The plaintiffs alleged that Frontier’s oil operations in Beverly Hills had caused “releases, discharges, fugitive emissions, leaks and spills” of toxic chemicals into the environment and that this had resulted in personal injuries and deaths. Frontier tendered these lawsuits to RLI, but RLI declined to defend Frontier.

Frontier then filed a declaratory relief/bad faith action against RLI in California state court. The trial court ruled that Texas law governed the dispute and that, under Texas law, the pollution liability endorsement provided for indemnity against sudden and accidental releases of pollutants but did not provide for a defense against suits seeking such damages. The trial court thus ruled that RLI had no duty to defend Frontier in the underlying lawsuits.  Frontier appealed. 

Holding

The Court of Appeal reversed, holding that RLI was obligated to defend Frontier in the underlying lawsuits.

The Court reasoned that under California Civil Code section 1646, a contract is to be interpreted according to the law of the place it is to be performed if the contract “indicate[s] a place of performance,” and according to the law of the place it was made if the contract “does not indicate a place of performance.” The Court then concluded that for purposes of section 1646, a contract “indicate[s] a place of performance” if the contract expressly specifies a place of performance or if the intended place of performance can be gleaned from the nature of the contract and its surrounding circumstances. The Court concluded that since California was the location of the risk insured under the policy, California was the state where the parties intended that RLI would be obligated to perform its defense obligations under the policy. Thus, California law—not Texas law—governed interpretation of the policy. 

The Court, interpreting the policy under California law, then held that the RLI policy included a duty to defend Frontier against suits seeking damages arising from “sudden and accidental” releases of pollutants. The Court reasoned that the policy’s pollution liability endorsement did not clearly and unmistakably exclude pollution claims from the duty to defend stated in the main coverage form, and therefore the pollution liability endorsement did not exclude pollution claims from the contractual duty to defend. Since the plaintiffs in the underlying actions were seeking damages from Frontier as a result “sudden and accidental” releases of pollutants covered by the policy’s pollution liability endorsement, RLI had a duty to defend.

Comment

This case presented a “choice-of-law” problem, which can arise when a legal dispute has connections with more than one state. In this case, the Court emphasized that California was the location of the risk insured under the policy, and thus California was where the parties understood the insurer would have to perform its defense obligation. The Court held that under these circumstances the policy impliedly “indicate[d] a place of performance,” and therefore pursuant to California Civil Code section 1646 California law should govern issues of policy interpretation.

Top of Page

Foreclosures: Lender Insurance Claims Require Understanding of "Credit Bid" Rules

Given the rising tide of foreclosures, insurers and lenders need to understand how California’s “credit bid” rules affect coverage for pre-foreclosure property damage.

Generally, when a lender forces a foreclosure sale, anyone—including the lender—can bid on the property at the sale. At the foreclosure sale, the lender has “credit” that is equal to the sum of the unpaid principal, accrued interest, late charges and costs of sale. Because it would be a pointless exercise for a lender to tender cash or a check to itself to satisfy the unpaid debt, the courts recognize that the lender can use some or all of this “credit” to bid on the property at the sale.

If the lender acquires title at the foreclosure sale and then determines the property sustained damage prior to the sale, the lender often will make a claim against any property insurance policy on which the lender was named as a loss payee. However, in many instances, the “credit bid” rules will limit or even altogether eliminate the lender’s recovery against the policy. (Track Mortgage Group, Inc. v. Crusader Insurance Company (2002) 98 Cal.App.4th 857.) 

Very briefly, a loss payee’s recovery for damage that occurred before the sale is limited to the difference between the amount of the debt and the amount of the lender’s credit bid at the foreclosure sale. Two examples illustrate application of the credit bid rules.

Suppose the full amount of the debt is $100,000 and the lender acquires title at the foreclosure sale by making a credit bid of $50,000. (This generally is known as a “partial credit bid,” because the lender used only part of its “credit” to acquire title.) However, after acquiring title, the lender discovers that, prior to the foreclosure sale, the property sustained damage of $75,000 caused by a peril covered by the policy on which the lender is named as the loss payee. Although the property has damage of $75,000, the carrier is obligated to pay the lender only $50,000 (i.e., the difference between the debt of $100,000 and the lender’s partial credit bid of $50,000).

Alternatively, suppose the full amount of the debt is $100,000 and the lender acquires title at the foreclosure sale by making a credit bid of $100,000. (This generally is known as a “full credit bid,” because the lender used the full amount of its “credit” to acquire title.) However, after acquiring title, the lender discovers that, prior to the foreclosure sale, the property sustained damage of $75,000 caused by a peril covered by the policy on which the lender is named as the loss payee. Although the property has damage of $75,000, the carrier is obligated to pay the lender nothing (i.e., the difference between the debt of $100,000 and the lender’s full credit bid of $100,000).

In order to determine the possible effect of California’s credit bid rules, it is first necessary to determine whether the damage occurred before or after the foreclosure sale. Remember, the credit bid rules apply only to damage that occurred before the sale.

To determine when the sale occurred, it generally will be necessary to review a copy of the deed by which the lender acquired title. In California, this deed generally is known as a “trustee’s deed” and is a public record. A copy of the trustee’s deed usually will indicate the date of the foreclosure sale, the amount of the unpaid debt, the amount of the successful bid and the identity of the successful bidder (whether the lender or some third party).

Note that, in California, the trust deed arrangement is the most prevalent type of security agreement for financing real estate. A trust deed involves three parties: the trustor (the borrower/insured), the trustee (a disinterested third-party) and the beneficiary (the lender/loss payee). The three-party trust deed arrangement is similar (but not identical) to the two-party mortgage arrangement. However, California courts and even the California Insurance Code use the two concepts somewhat interchangeably.

Readers with more specific inquiries regarding claims by lenders/loss payees should feel free to email Stephen Smith at .

Top of Page