News - July 2007

• Where Two Insureds Have Separate Policies Covering Same Property, Each Insurer Must Pay Only Part of Loss
• “Development/Construction Exclusion” Applies Only If Insured - Not Another Party - Engages in Excluded Activity
• California Supreme Court Watch

< Return to News page

Top of Page

Where Two Insureds Have Separate Policies Covering Same Property, Each Insurer Must Pay Only Part of Loss

The California Court of Appeal has held that, where two separate insureds have two separate policies covering the same property, each insurer must pay for only a part of a loss to the property. (Burns v. California Fair Plan Association (2007) 61 Cal.Rptr.3d 809)

Facts

Ann Burns (Burns) held a life estate in a residence. The Kent Burns Trust (the Trust) held the remainder interest in the property. Burns insured her life estate interest in the property through California Fair Plan (Fair Plan). The Trust separately insured its remainder interest through Clarendon National Insurance Company (Clarendon).

Fair Plan’s policy provided coverage on an actual cash value basis, and had a limit of $477,000. Clarendon’s policy provided coverage on a replacement cost basis, and had a limit of $330,000. Thus, the combined limit of both policies was $807,000.

After a fire destroyed the residence, Burns submitted a claim to Fair Plan and the Trust submitted a claim to Clarendon. The actual cash value of the damaged property was $474,000, and the replacement cost was $486,080. Both Fair Plan’s policy and Clarendon’s included “other insurance” provisions. Fair Plan’s policy had an “excess” clause and Clarendon’s policy had a “pro rata” clause.

The insurers asserted that Burns and the Trust were not both entitled to the full insured value of the property. Instead, the insurers asserted that Burns and the Trust should recover on a pro rata basis. As such, Fair Plan divided its policy limit of $477,000 by $807,000, and calculated its pro rata liability at $279,410 (i.e., 59 percent of the actual cash value of $474,000, less a deductible of $250). Similarly, Clarendon divided its policy limit of $330,000 by $807,000, and calculated its pro rata liability at $198,792 (i.e., 41 percent of the replacement cost of $486,080, less a deductible of $500). Thus, Fair Plan paid $279,410 to Burns, and Clarendon paid $198,792 to the Trust.

Burns and the Trust filed an action alleging causes of action for breach of contract and bad faith. They each sought full recovery on their respective insurance policies, rather than the pro rata payment the insurers made. The trial court granted summary judgments in favor of the insurers, and Burn and the Trust appealed.

Holding

The Court of Appeal noted that both Burns and the Trust had separate insurable interests in the property, but noted that neither Burns’ interest nor the Trust’s interest was equal to the whole value of the property. Instead, the value of Burns’s life estate by definition was of limited duration, and the value of the Trust’s remainder interest was dependent on how long Burns survived.

Insurance Code section 590 provides as follows: “Double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest.” Insurance Code section 591 provides as follows: “In case of double insurance, the several insurers are liable to pay losses thereon as follows: (a) In fire insurance, each insurer shall contribute ratably, without regard to the dates of the several policies.” The Court of Appeal noted that this case did not involve “double insurance,” because Fair Plan and Clarendon did not both insure “the same person.”

Insurance Code 2071 provide as follows: “This company shall not be liable for a greater proportion of any loss than the amount hereby insured shall bear to the whole insurance covering the property against the peril involved, whether collectible or not.” According to the Court of Appeal, this provision evidences a legislative intent to allow pro rata payment of claims even where there is no “double insurance” and even where there are different insureds.

Together, the insurers paid $478,202. This amount was more than the estimated actual cash value of the destroyed property of $474,000. Thus, the Court of Appeal ruled that the insurers had fully paid their obligations under the policies, and that summary judgment in favor of the insurers was proper.

Comment

This case illustrates that property insurance is not intended to provide for recovery in excess of the value of the property destroyed where there is only one loss. It also illustrates that, where different persons or entities have separate interests in the same property, the value of each interest must be determined separately. Here, allowing each insurer to pay its own insured for only a portion of the total loss prevented either insured from gaining a windfall.

Top of Page

"Development/Construction Exclusion" Applies Only If Insured - Not Another Party - Engages in Excluded Activity

 The California Court of Appeal has concluded that a liability policy’s “development/construction exclusion” applied only if the insured—and not some third party—engaged in the excluded activity. (Marquez Knolls Property Owners Association, Inc. v. Executive Risk Indemnity, Inc. (2007) WL 2007569)

Facts

Marquez Knolls Property Owners Association, Inc. (Association) is a non-profit corporation whose members own or reside in homes in the Marquez Knolls area of Pacific Palisades, California. One of the Association’s main activities is to mediate disputes between its members over the covenants, conditions and restrictions (CC&Rs) to which their properties were subject.

Association members Nicholas and Yasuko Valery remodeled their property. Later, a neighboring homeowner, Joan Robertson, complained that the Valerys’ construction obstructed views from Robertson’s property, in violation of the CC&Rs. 

In response to Robertson’s complaint, the Valerys contacted the Association for assistance in resolving the dispute. The Association allegedly told the Valerys that it would provide informal, non-partisan assistance in an effort to help the neighbors settle their differences. In fact, however, the Association allegedly took Robertson’s side in the dispute; issued a formal determination stating that the Valerys’ replacement structure violated the CC&Rs; and assisted Robertson in prosecuting a lawsuit against the Valerys.

The Valerys subsequently sued the Association for fraud, breach of fiduciary duty and breach of duty to act in good faith. The Association tendered defense of the lawsuit to Executive Risk Indemnity, Inc. (Executive Risk) under a policy which covered the Association for “wrongful acts,” defined as “any actual or alleged error, omission, misstatement, misleading statement or breach of duty.” However, the policy also contained a “development/construction exclusion” which barred coverage for any wrongful act “based on, arising out of … or any way involving … the design, construction, renovation or rehabilitation of any … structure or other improvement on any real property.” Executive Risk, relying on the development/construction exclusion, declined to defend the Association against the Valerys’ lawsuit.

The Association then brought a bad faith action against Executive Risk, claiming that Executive Risk had wrongfully failed to defend the Association in the underlying lawsuit filed by the Valerys. The trial court found that the policy’s “development/construction exclusion” barred coverage for any potential liability the Association might have in the underlying lawsuit filed by the Valerys, and thus ruled that Executive Risk had no duty to defend the Association in the Valerys’ lawsuit. The Association appealed.

Holding

The Court of Appeal reversed, holding that the “development/construction exclusion” did not bar coverage for the Association’s alleged liability to the Valerys in the underlying lawsuit. According to the court, when read in context, the development/construction exclusion only barred coverage for liability arising from the insured’s “design, construction, renovation or rehabilitation” of a structure, not someone else’s “design, construction, renovation or rehabilitation” of a structure. Here, the Valerys’ claims against the Association arose not from the Association’s construction activities, but rather from the Valerys’ construction activities. Thus, the exclusion did not relieve Executive Risk of the duty to defend the Association against the Valerys’ lawsuit.

Comment

Top of Page

California Supreme Court Watch

Set forth below is list of some significant property and casualty insurance cases currently pending in the California Supreme Court, along with a summary of the primary issue(s) to be decided in each case. As the Supreme Court decides these cases in upcoming months, we will keep our readers informed.

Wilson v. 21st Century Ins. Co. (case no. S141790) - The primary issue in this case is: Does an insurer act in bad faith if it resolves an underinsured motorist bodily injury claim on the basis of the insured’s medical records without consulting the insured’s treating physician or having the insured examined by a doctor of the insurer’s own choice?

Bouton v. USAA Casualty Ins. Co. (case no. S149851) - This case presents the following issue: Does the arbitrator or the court decide whether a claimant is an insured under an underinsured motorist insurance policy when both the policy and Insurance Code section 11580.2 require arbitration of (a) whether the insured is entitled to collect damages from the driver of the underinsured vehicle and (b) if so, the amount?

State of California v. Underwriters at Lloyds London (case no. S149988) - This case includes the following issues: (1) Does application of the pollution exclusion clause in a liability policy turn on when waste material was discharged from a waste disposal site or when the waste was initially deposited into the site? (2) If pollution is caused by both uncovered intentional actions and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is an uncovered act?

Top of Page