News - January 2007

• Whether Person Qualifies as “Insured” For UM/UIM Claim Must Be Decided By Arbitrator
• Insurer Obligated to Indemnify for Pollution Remediation Where Covered and Non-Covered Event are Concurrent Causes of Indivisible Damage
• Arbitration Must Be Completed Before Insured May Pursue Lawsuit for UM/UIM Benefits
• In Rental Car Transaction, Excess Insurer Has Limited Duty to Investigate Insurability and Can Rely on Misrepresentations to Avoid Coverage
• Recent Legislation: California Legislature Amends Statute Governing Priorities of Multiple Insurers Covering Motor Vehicle Accidents

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Whether Person Qualifies as "Insured" For UM/UIM Claim Must Be Decided By Arbitrator

The California Court of Appeal has held that the issue of whether a UM/UIM claimant qualifies as an “insured” is a jurisdictional issue that must be decided by an arbitrator, and that policy provisions that purport to remove such issues from the scope of arbitration are not enforceable. (Bouton v. USAA Casualty Insurance Company (2006) WL 3743821)

Facts

A third party caused an automobile accident in which Lloyd Bouton was injured. Bouton settled for $15,000, the third party’s policy limits.

Bouton then filed a petition to compel arbitration of a claim for UIM benefits against USAA Casualty Insurance Company, which had issued an automobile insurance policy to Bouton’s sister. In his petition, Bouton alleged that he was a permanent resident of his sister’s household at the time of the accident.

USAA opposed Bouton’s petition, asserting that the language of USAA’s policy expressly allowed arbitration only of two issues: (1) whether a “covered person” was entitled to recover damages from a third party and (2) the amount of the damages. In fact, the language of USAA’s policy expressly provided that any arbitration “shall not address … coverage questions.”  USAA asserted that the issue of whether Bouton was a resident of his sister’s household was a coverage question, and that the issue could not be resolved through arbitration. The trial court agreed with USAA, and denied Bouton’s petition to compel arbitration.

Holding

The Court of Appeal reversed, holding that USAA could not contractually limit is arbitration provision to the issues of (1) the third party’s liability and (2) damages. California Insurance Code section 11580.2, which governs UM/UIM coverage provisions, requires arbitration of all disputes, including disputes regarding jurisdictional  facts, such as whether a particular person qualifies as an insured.

Comment

This case reiterates the rule set forth in Van Tassel v. Superior Court (1974) 12 Cal.3d. 624, in which the California Supreme Court explicitly held that arbitrators in UM/UIM disputes have sole authority to decide whether a particular claimant qualifies as an insured. In fact, the Court of Appeal in this case actually held that jurisdictional facts in UM/UIM claims must be submitted to arbitration, and that contractual provisions to the contrary are unenforceable.

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Insurer Obligated to Indemnify for Pollution Remediation Where Covered and Non-Covered Event are Concurrent Causes of Indivisible Damage

The California Court of Appeal has held that, where covered and non-covered events are concurrent causes of indivisible pollution damage, an insured seeking indemnity under a liability policy is not required to allocate its liability based on the cause of the underlying damage, and the insurer is obligated to provide indemnity for the entire loss. (State of California v. Underwriters at Lloyds of London (2006) 2006 WL 3823525)

Facts

The State of California selected, designed and built a Class I hazardous waste disposal facility in Riverside County (the “Stringfellow Site”). Liquid industrial waste deposited at the Stringfellow Site escaped and contaminated adjacent property as well as groundwater and a creek that flowed to a nearby community. A federal court ordered the State to remediate the contaminated property. The State sought indemnity from four of its insurers for the costs of remediation, which the State claimed exceeds $500 million.

Discovery revealed at least two potential causes of the contamination. First, industrial waste gradually and continuously escaped underground through fissures in the granite walls at the Stringfellow Site. Second, during massive rains in 1969, industrial waste combined with rain overflowed the banks at the Stringfellow Site and also escaped through a washed out dike at the Site. The State admitted that it could not differentiate the expenses it paid to remedy the property damage caused by the 1969 release of contaminants (which was covered as a “sudden and accidental” release) from the expenses it paid to remedy the property damage caused by the gradual and continuous release of contaminants through the fissures in the granite walls (which was not covered because it was not a “sudden and accidental” release).

The trial court entered summary judgment in favor of the insurers, based in part on the State’s inability to allocate damage between “covered” and “uncovered” causes. The State disagreed with the trial court and filed an appeal.

Holding

The Court of Appeal overturned the order granting summary judgment in favor of the insurers, relying on evidence that the 1969 release of contaminants might have contributed to the property damage for which the State was held liable. The Court based its ruling on the “concurrent cause” rule for third-party liability coverage cases, as established by the Supreme Court in State Farm Mutual Auto Ins. Co. v. Partridge (1973) 10 Cal.3d 94.

In Partridge, the insured altered his gun to make the trigger easier to pull. While the insured was driving his truck off-road with friends, the truck hit a bump, causing the gun to discharge and wounding one of the passengers. The Supreme Court held that the insured’s homeowner liability insurer had a duty to indemnify the insured in full for his liability since the injury was caused concurrently by an event the homeowner policy covered (i.e., the insured’s alteration of his gun) and an event the homeowner policy did not cover (i.e., the insured’s use of a vehicle). The Court interpreted Partridge as holding that liability resulting in part from a concurrent covered cause should be wholly, not partially, indemnified by an insurer.

The Court found that the 1969 release of contaminants could be a concurrent cause of the property damage for which the State was held liable. In that case, pursuant to Partridge, the insurers would have a duty to indemnify the State for all of its remediation costs even if the same damage also resulted from uncovered releases of contaminants.

In reaching its decision, the Court rejected the holdings in Golden Eagle Refinery Co. v. Associated Int’l Ins. Co. (2001) 85 Cal. App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal. App.4th 187. In those cases, Courts of Appeal ruled that in order to trigger an insurer’s duty to indemnify, the insured bears the burden of proving which damage was caused by covered discharges of contaminants and which damage was caused by uncovered discharges of contaminants. The Court held that Golden Eagle Refinery and Lockheed were inconsistent with the Supreme Court’s decision in Partridge.

Comment

The State v. Underwriters decision has significant ramifications for environmental contamination and construction defect coverage cases, which typically involve property damage resulting from a combination of independent covered and uncovered events. Pursuant to the “concurrent cause” rule, as applied in State v. Underwriters, insureds in that situation will be entitled to indemnity for their entire property damage liability unless the insurers can trace damage to uncovered causes or uncovered policy periods.

The State v. Underwriters decision creates a clear split in appellate authority. Based on the significance of this coverage issue, the Supreme Court might review State v. Underwriters or a construction defect case to consider the “concurrent causation” doctrine and its application.

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Arbitration Must Be Completed Before Insured May Pursue Lawsuit for UM/UIM Benefits

The Court of Appeal has held that, under the terms of Insurance Code section 11580.2 and a policy providing UM/UIM coverage, an insured seeking underinsured motorist benefits was required to arbitrate the issues liability and damages before proceeding with a suit against an insurer for breach of contract and bad faith. (O’Hanesian v. State Farm Mutual Automobile Insurance Company (2006) 2006 WL 3719628)

Facts

Charles O’Hanesian sustained injuries when his vehicle was rear-ended by a vehicle driven by Curtis Thurlow. O’Hanesian sued Thurlow, and obtained a $3.751 million default judgment against Thurlow. Farmers Insurance Exchange, Thurlow’s insurer, paid O’Hanesian the $100,000 policy limit on Thurlow’s policy.

O’Hanesian then submitted a claim to State Farm Mutual Automobile Insurance Company (which had issued an automobile policy providing $100,000 in UM/UIM coverage) and State Farm General Insurance Company (which had issued an umbrella policy providing an additional $1 million in UM/UIM coverage).

State Farm’s automobile policy required O’Hanesian to provide State Farm with all the details about the injury, treatment or other information needed to determine the amount payable, and to be examined by physicians chosen by State Farm. The policy provided that State Farm and O’Hanesian had to agree on whether O’Hanesian was legally entitled to collect damages from Thurlow and if so, the amount of those damages. The policy also provided that, if there was no agreement, the issues of liability and damages would be decided by arbitration as provided under Insurance Code section 11580.2.

State Farm asserted it wanted to evaluate the nature and extent of O’Hanesian’s injuries and requested that he submit to a medical evaluation. O’Hanesian contended that his judgment against Thurlow conclusively established the nature, extent and amount of his damages, that there was nothing more for State Farm to evaluate and, therefore, he was entitled to the maximum amount of benefits available under his policy.

O’Hanesian then sued State Farm, and the trial court ruled that O’Hanesian’s suit was premature because Insurance Code section 11580.2 required O’Hanesian to complete arbitration proceedings before he could sue them for breach of contract or breach of the implied covenant of good faith and fair dealing.

Holding

Relying on its prior decisions in United Services Auto. Assn. v. Superior Court (1990) 221 Cal.App.3d 79 and Chrisman v. Superior Court (1987) 191 Cal.App.3d 1465, the Court of Appeal held that the arbitration provisions of Insurance Code section 11580.2(f) apply to both uninsured motorist claims and underinsured motorist claims. The Court also held that O’Hanesian was free to argue the judgment he obtained against Thurlow was conclusive of liability and damages, but that O’Hanesian needed to make that argument to the arbitrator, not to the trial court.

Comment

In upholding the policy’s arbitration provision, even in a situation in which it appeared that the issues of liability and damages had already been resolved, the court demonstrated California’s strong public policy in favor of upholding and enforcing arbitration provisions.

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In Rental Car Transaction, Excess Insurer Has Limited Duty to Investigate Insurability and Can Rely on Misrepresentations to Avoid Coverage

The California Supreme Court has held that in the context of a rental car transaction, an excess auto liability insurer satisfies its duty to investigate the insurability of an insured by inspecting the insured’s facially valid driver’s license and verifying the insured’s signature. Therefore, if the insured misrepresents that he has a valid license, the excess insurer can rely on that misrepresentation as a basis for avoiding liability to third parties injured by the insured. (Philadelphia Indemnity Insurance Company v. Montes-Harris (2006) 40 Cal.4th 151)

Facts

Alric Burke (Burke) lived in Arizona. In approximately April 2001, Arizona authorities suspended his driver’s license and driving privileges.

Two months later, in June 2001, Burke rented a car in California from Budget Rent-A-Car (Budget). Burke showed Budget’s rental agent what appeared to be a valid Arizona driver’s license. Budget’s rental agent photocopied Burke’s license and had Burke sign the rental agreement.

At the time of the rental transaction, Budget was the named insured on a master excess liability policy issued by Philadelphia Indemnity Insurance Company (Philadelphia). The Philadelphia excess policy provided limits of $1 million in excess of the minimum statutory limits of $15,000 per person and $30,000 per occurrence for bodily injury. However, the policy excluded coverage for injuries arising out of the use of a rental car “obtained through fraud or misrepresentation.”  Budget had authority to enroll its customers as additional insureds under the policy if the customers so opted, without submitting a written application to Philadelphia.

After inspecting Burke’s license and verifying his signature as required by statute, Budget’s rental agent concluded that Burke was qualified to rent a car. Thus, Budget’s rental agent, acting as Philadelphia’s agent for the limited purpose of offering and selling excess liability insurance, offered Burke the option of buying such insurance. Burke accepted the offer and purchased the excess insurance.

A few days after renting the car, Burke was involved in a car accident in California that injured numerous people (the claimants). The claimants filed a state court action against Budget and Burke to recover damages arising from the accident.

Philadelphia filed a federal court action seeking a judgment that it had no liability for any damages in the underlying personal injury action. The district court ruled that (1) Burke made “at least a negligent misrepresentation” to Budget that he had a valid driver’s license, and (2) Philadelphia’s excess policy excluded coverage for rentals obtained through misrepresentation. The district court thus ruled that Philadelphia had no liability for damages arising from the accident.

The claimants appealed to the Ninth Circuit Court of Appeals. The claimants argued that under Barrera v. State Farm Mutual Automobile Ins. Co. (1969) 71 Cal.2d 659, an auto liability insurer has a duty to conduct a reasonable investigation of the insurability of the insured within a reasonable time of issuance of the policy. The claimants argued that if the insurer breaches its duty under Barrera to investigate insurability, the insurer cannot rely on the insured’s misrepresentations in procuring the policy as a basis for avoiding liability to third parties who are injured by the insured.

While the appeal was pending before the Ninth Circuit, the Ninth Circuit requested that the California Supreme Court address whether an auto insurer’s duty to investigate insurability applies to an excess insurer in the context of a rental car transaction. The Supreme Court agreed to address that question.

Holding      

The Supreme Court concluded that where the sale of excess liability insurance in a rental car transaction occurs after the customer presents a facially valid driver’s license and after the license inspection and signature verification requirements of Vehicle Code section 14608 have been met, the excess insurer has no obligation under Barrera to conduct a further inquiry regarding the customer’s driver’s license. The Supreme Court held that in such a situation, if the insurer acts promptly upon discovering that the customer’s driver’s license was in fact suspended, then the excess insurer does not forfeit any right to rely on the customer’s presentation of the invalid license as a basis for avoiding liability to third persons under the excess policy.

Comment

The Supreme Court avoided deciding whether the Barrera duty to investigate insurability generally applies, or does not apply, to all excess automobile liability insurers. Rather, the court assumed for purposes of discussion that the Barrera duty applies to excess insurers, but then concluded that Philadelphia had not breached that duty. Although the question of whether an insurer has conducted a timely and reasonable investigation of insurability is generally a question of fact, the court concluded that here it was a question of law.

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Recent Legislation: California Legislature Amends Statute Governing Priorities of Multiple Insurers Covering Motor Vehicle Accidents

California Insurance Code section 11580.9 sets forth a series of rules that are intended to govern the priorities of multiple insurers covering the same insured allegedly responsible for a motor vehicle accident.

Section 11580.9(b) formerly provided that where two or more insurance policies applied to the same loss and one policy afforded coverage to a named insured “engaged in the business of renting or leasing motor vehicles without operators,” it was conclusively presumed that such policy would be “excess” to any other valid and collectible insurance policies. At least one California appellate court interpreted the language “engaged in the business of renting or leasing vehicles” to require something more than a single or occasional lease. In response to such court rulings, the California Legislature has now amended section 11580.9(b).

The amended section provides that where two or more insurance policies apply to the same loss and one policy affords coverage to a named insured “who in the course of his or her business rents or leases motor vehicles without operators,” it is conclusively presumed that such policy shall be excess to the other valid and collectible insurance policies. This change became effective January 1, 2007.

The Legislature has also added a new section to the statute. That new section—11580.9(h)—provides that when two or more insurance policies apply to the same loss and one policy affords coverage to a person engaged in the business of a “trucker,” that policy shall be primary for both the power unit and the trailer or trailers, and the insurance afforded by the other policies shall be excess. This new section is intended to clarify the priorities between insurers following truck accidents in which the power unit is insured by one insurer and the trailer is insured by another. This amendment also became effective January 1, 2007.

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