Insurance Law News - July 2011

• Deliberate Act Causing Unintended Injury Is Not "Occurrence"
• Exclusion for "Condominium and Townhouse Projects" Bars Coverage for Insured's Work on Condominium Project
• Insurer Has No Duty to Defend Insured Against Suit Alleging Violations of California Safe Drinking Water and Toxic Enforcement Act

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Deliberate Act Causing Unintended Injury Is Not "Occurrence"

An insured’s deliberate act that caused unintended injury to the claimant was not an “occurrence,” or “accident,” within the meaning of a liability policy. (State Farm General Insurance Company v. Frake (2011) WL 2714179)

Facts

John King and Patrick Frake were friends. During high school and continuing thereafter, King, Frake and several other friends frequently engaged in consensual “horseplay” which involved hitting each other in the groin.

King and Frake attended a baseball game together where Frake became intoxicated. After the game, as part of their horseplay tradition, King attempted to hit Frake in the groin, but Frake blocked the attempt. Frake then “retaliated” by throwing his arm out to the side and striking King in the groin. Although Frake did not intend to injure King, King suffered a serious injury to his testicles.

King later filed a personal injury action against Frake alleging negligence, assault and battery and intentional infliction of emotional distress. Frake tendered the defense of the lawsuit to State Farm Insurance General Insurance Company pursuant to a renters policy that provided coverage for damages because of bodily injury caused by an “occurrence.” The policy defined the term “occurrence” as “an accident ....” Eventually, State Farm agreed to defend Frake against King’s lawsuit, under a reservation of rights.

King’s lawsuit against Frake proceeded to trial solely on a negligence theory. The jury found that Frake had acted negligently and awarded King over $450,000 in damages. Frake and King then entered into an agreement in which King promised not to execute on Frake’s personal assets, and in exchange King received an assignment of Frake’s rights against State Farm.

State Farm filed a declaratory relief action seeking a determination that it had no duty to defend or indemnify Frake against King’s claims. The trial court concluded that State Farm did have a duty to defend and indemnify Frake, and entered judgment against State Farm. State Farm appealed.

Holding

The Court of Appeal reversed. The appellate court acknowledged that an “accident” may exist “when any aspect in the causal series of events leading to the injury or damage was unintended by the insured and a matter of fortuity.” However, “where damage is the direct and immediate result of an intended ... event, there is no accident.” Here, Frake admitted that he intended to strike King in the groin area, and it was undisputed that King suffered injuries as a direct result of the strike. Therefore this was not a case where some “unexpected, independent, and unforeseen happening” in the causal chain produced the resulting harm. Rather, King's injuries were “the direct and immediate result of an intended ... event.” The mere fact that Frake did not intend to injure King did not transform Frake’s intentional conduct into an accident.

Because King’s claims against Frake did not arise from an “occurrence,” or “accident,” State Farm did not have any duty to defend or indemnify Frake in the underlying action brought by King.

Comment

The Frake court acknowledged and discussed a prior case, State Farm Fire & Casualty Co. v. Superior Court (2008) 164 Cal.App.4th 317 (Wright). In Wright, the insured attempted to throw the claimant into a swimming pool, but did not use enough force, with the result that the claimant landed on a step in the shallow end and suffered injuries. The court in Wright found that, under those circumstances, where the insured’s deliberate conduct produced an unintended injury to the claimant, there was an “occurrence,” or “accident.” However, the Frake court found that Wright was not controlling, for at least two reasons.

First, Wright was factually distinguishable because in Wright the insured’s deliberate conduct (i.e., throwing the claimant into the pool) was followed by an “intervening act” (i.e., the claimant landing on a step in the shallow end) which in turn produced the injury to the claimant. By contrast, in Frake, there was no “intervening act” between the insured’s deliberate conduct and the claimant’s injury.

Second, to the extent Wright held that an “occurrence” or “accident” includes a deliberate act that directly causes unintended harm, such a holding “is contradictory to well-established California law.” Specifically, according to the Frake court, an “occurrence” or “accident” is not present where the insured commits a deliberate act that directly results in unintended harm to the claimant.

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Exclusion for "Condominium and Townhouse Projects" Bars Coverage for Insured's Work on Condominium Project

A commercial general liability policy’s exclusion for “condominium and townhouse projects” precluded coverage for an insured’s work on a condominium project, even though the project consisted of free-standing residential units that resembled detached single-family homes. (California Traditions, Inc. v. Claremont Liability Insurance Company (2011) WL 2452684)

Facts

California Traditions, Inc. undertook to develop a 146-unit residential project. Although the project was legally classified as a “condominium project,” the residential units were to be free-standing units with no shared walls, roofs, halls, plumbing lines or electrical lines.

California Traditions hired Ja-Con Systems, Inc. to act as framing subcontractor for the project. Ja-Con Systems allegedly was unaware that the project was legally classified as a “condominium project.”

After the project was completed, California Traditions sold the units to various buyers. The purchase documents and grant deeds all described the units as “condominiums.”

Later, one of the residents in the project filed a construction defect lawsuit against the developer, California Traditions. California Traditions in turn filed a cross-complaint for indemnity against the framing subcontractor, Ja-Con.

Ja-Con tendered defense of the construction defect action to its general liability insurer, Claremont Liability Insurance Company. The Claremont policy contained a “condominium and townhouse projects” exclusion which precluded coverage for bodily injury or property damage “that arises out of an insured’s operations, work product or products that are incorporated into a condominium … or townhouse project.” Relying on this “condominium and townhouse projects” exclusion, Claremont declined to defend Ja-Con in the construction defect action. Thereafter, California Traditions obtained a $2 million default judgment against Ja-Con in that action.

California Traditions then filed a judgment creditor action against Ja-Con’s liability insurer, Claremont, seeking to collect the underlying $2 million judgment from Claremont. The trial court ruled that California Traditions’ judgment against Ja-Con in the underlying action was excluded from coverage by the “condominium and townhouse projects” exclusion in the Claremont policy. The trial court thus entered judgment in favor of Claremont. California Traditions appealed.

Holding

The Court of Appeal affirmed. The appellate court noted that California Traditions had developed and constructed the project as a “condominium project,” and had marketed and conveyed the units as a “condominiums.” That was sufficient to trigger the Claremont policy’s exclusion for any liability Ja-Con had arising from work on a “condominium or townhouse project.”

California Traditions argued that free-standing residential units resembling non-condominium single family residences should not be considered “condominiums,” and therefore the term “condominium project” was ambiguous. The appellate court disagreed, noting that California Civil Code section 1351 defines a “condominium project” as a “development consisting of condominiums,” and then defines a “condominium” as “an undivided interest in common in a portion of real property coupled with a separate interest in space called a unit…. The description of the unit may refer to ... (3) an entire structure containing one or more units....” (Italics added.) Thus, according to the court, a free-standing unit is one type of condominium unit that may comprise part of a “condominium project.”

California Traditions also argued that the condominium or townhouse project exclusion should be deemed unenforceable because the work Ja-Con performed did not “materially alter the risk” contemplated by the parties under the policy. Specifically, California Traditions argued that the risk posed by Ja-Con’s work on structures in the subject condominium project was no greater than the risk which would have been posed if Ja-Con had worked on identical structures in a tract of non-condominium single family residences. The appellate court rejected this argument, reasoning that Claremont was not required to prove that there was an “actuarial basis” for an exclusion in order to enforce the exclusion.     

In short, California Traditions’ underlying judgment against Ja-Con was not covered under the Claremont policy. Thus, California Traditions was not entitled to recover under the Claremont policy.

Comment

Perhaps the most interesting aspect of this case is the appellate court’s holding that an insurer does not have to prove that there is an “actuarial basis” for an exclusion in order to enforce the exclusion. In so holding, the appellate court disagreed with a prior decision – Scottsdale Ins. Co. v. Essex Ins. Co. (2002) 98 Cal. App. 4th 86 – which reached a contrary result. The appellate court stated that the Scottsdale decision “has gained no traction in any subsequently published case,” and further stated that the Scottsdale decision appears to be at odds with existing case law upholding an insurer’s right to limit coverage without demonstrating actuarial impact.

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Insurer Has No Duty to Defend Insured Against Suit Alleging Violations of California Safe Drinking Water and Toxic Enforcement Act

A general liability insurer had no duty to defend or indemnify its insured against a suit seeking civil penalties and injunctive relief arising from the insured’s alleged violation of the California Safe Drinking Water and Toxic Enforcement Act of 1986. (Ulta Salon, Cosmetics & Fragrance, Inc. v. Travelers Property Cas. Co. of America (2011) WL 2279527)

Facts

Ulta Salon, Cosmetics & Fragrance, Inc. is a nail products manufacturer. In 2007, Christine Deubler filed an action “on behalf of the general public” against Ulta and other nail products manufacturers, alleging that the defendants had violated the California Safe Drinking Water and Toxic Enforcement Act of 1986, Cal. Health & Safety Code § 25429.5, et seq. (commonly known as Proposition 65). Specifically, Deubler alleged that the defendants' nail products contained a reproductive toxin known as Dibutyl Phthalate (DBP); that the State of California had previously listed DBP as a chemical known to cause reproductive toxicity; and that the defendants had violated Proposition 65 by failing to give consumers a “clear and reasonable warning” regarding the reproductive toxicity caused by exposure to DBP. Pursuant to Proposition 65, Deubler sought civil penalties of $2,500 per day for each defendant’s failure to warn consumers about the reproductive toxicity caused by exposure to DBP, as well as an injunction barring defendants from offering their nail products for sale without disclosing the presence of DBP in the products.

Ulta tendered defense of the lawsuit to Travelers Property Casualty Company of America, pursuant to a general liability policy that required Travelers to defend Ulta against any suit seeking damages because of “bodily injury.” The policy defined “bodily injury” as “bodily injury, sickness or disease sustained by a person….” Travelers refused to defend Ulta against Deubler’s lawsuit, asserting there was no potential for coverage. Thereafter, Ulta incurred approximately $267,000 in defending against and settling Deubler’s lawsuit.

Ulta then filed a breach of contract / bad faith action against Travelers, alleging that Travelers had wrongfully failed to defend Ulta in the underlying lawsuit brought by Deubler. The trial court concluded that Travelers had no duty to defend Ulta in the underlying lawsuit, and the trial court thus dismissed Ulta’s lawsuit against Travelers. Ulta appealed.

Holding

The Court of Appeal affirmed the dismissal of Ulta’s lawsuit against Travelers. The appellate court noted that in the underlying lawsuit, Deubler did not allege that she had used Ulta nail products, or that she had suffered any bodily injury due to exposure to Ulta's nail products. Rather, Deubler merely alleged that Ulta had violated Proposition 65 by failing to provide “clear and reasonable warnings” about nail products containing DPB. The appellate court emphasized that Proposition 65 was designed to notify consumers of potentially harmful products so that they could make informed decisions about using those products. Proposition 65 was not designed to compensate consumers for any actual damages sustained by them as a result of exposure to those products.

In short, the civil penalties recoverable for violations of Proposition 65 are not damages because of “bodily injury” within the meaning of a liability policy. Because Deubler’s claims against Ulta in the underlying lawsuit were not potentially covered under the Travelers policy, Travelers did not have any duty to defend Ulta in that lawsuit.

Comment

The appellate court rejected Ulta’s argument that Deubler “potentially” sought damages from Ulta in the underlying lawsuit because of “bodily injury” as defined in the Travelers policy. Rather, according to the appellate court, Deubler “pled nothing more than a failure to give clear and reasonable warnings in violation of Proposition 65.” Any penalties resulting from a mere failure to provide required warnings cannot be considered damages because of “bodily injury.”

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