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Insurance Law News - June 2010

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In Light of "Severability" Clause, Exclusion for Intentional Act of "An" Insured Only Applies to Particular Insured Who Commits Such Act

The California Supreme Court has held that based on a policy’s “severability” clause, an exclusion for the intentional act of “an” insured only applied to the particular insured who committed the intentional act, and did not apply to another insured who was merely negligent in failing to prevent the intentional act. (Minkler v. Safeco Ins. Co. of America (2010) WL 2402973)

Facts

Scott Minkler (Minkler) filed a lawsuit against David Schwartz (David) and David’s mother, Betty Schwartz (Betty). In his complaint, Minkler alleged that beginning in 1987 and continuing for several years thereafter, he had been sexually molested by David in Betty’s home. Minkler further alleged that Betty had negligently failed to prevent David’s acts.

During the time of the alleged molestations, Betty was the named insured on a series of homeowners policies issued by Safeco Insurance Company of America (Safeco). Betty’s son David also qualified as an insured on the policies. The policies specifically excluded coverage for bodily injury “which is expected or intended by an insured or which is the foreseeable result of an act or omission intended by an insured.” However, the policies’ “Conditions” section contained a “severability” clause which stated that “[t]his insurance applies separately to each insured. This condition will not increase our limit of liability for any one occurrence.”

David and Betty tendered Minkler’s lawsuit to Safeco for defense and indemnity. Relying on the policies’ exclusion for intentional acts of “an” insured, Safeco refused to defend either David or Betty against Minkler’s lawsuit.

Thereafter, Minkler obtained a default judgment against Betty for over $5 million. Betty assigned her claims against Safeco to Minkler, and Minkler agreed not to enforce the judgment against Betty’s personal assets.     

Minkler (as Betty’s assignee) then filed a bad faith lawsuit against Safeco in state court. Minkler alleged that the Safeco policies were ambiguous because the policies’ “severability” clause stated that “this insurance applies separately to each insured,” while at the same time the policies’ “intentional act” exclusion purported to bar coverage for all claims arising from intentional acts of “an insured.” Minkler thus alleged that the Safeco policies did not bar coverage for Betty’s alleged negligence in failing to prevent David’s intentional acts of molestation. Safeco removed the lawsuit to federal district court.

The federal district court ruled in favor of Safeco. The district court found that despite the policies’ “severability” clause, the policies’ exclusion for intentional acts of “an” insured precluded coverage for both an insured who commits an intentional act and any other insured who might only be negligently liable for such act. In other words, the intentional act of any one insured (such as David) barred coverage for all other insureds (such as Betty).

Minkler appealed to the Ninth Circuit Court of Appeals. During the pendency of the appeal, the Ninth Circuit requested the California Supreme Court to address the interplay between the policies’ “severability” clause and the policies’ exclusion for the intentional acts of “an” insured. The Supreme Court agreed to address that issue.

Holding

The California Supreme Court held that the Safeco policies’ exclusion for intentional acts of “an” insured, read in conjunction with the policies’ “severability” clause, created an ambiguity which had to be construed in favor of coverage. According to the Supreme Court, while an exclusion for the intentional acts of “an” insured would normally mean that the intentional act of one insured bars coverage for all insureds, a severability clause stating that “[t]his insurance applies separately to each insured” reasonably implies a contrary result. Given that ambiguity, Betty would “reasonably have expected Safeco’s policies … to cover her separately for her independent acts or omissions causing such injury or damage, so long as her conduct did not fall within the policies’ intentional acts exclusion, even if the acts of another insured contributing to the same injury or damage were intentional.” 

In short, given the policies’ “severability” clause, the exclusion for intentional acts of “an” insured did not bar coverage for Betty’s alleged negligence in failing to prevent David’s molestation of Minkler.

Comment

Minkler is an extremely important case. In several prior decisions, the California Courts of Appeal had interpreted an exclusion for intentional acts of “an” insured (as opposed to “the” insured) to mean that the intentional act of any one insured would bar coverage for all other insureds under the same policy. However, the prior cases did not specifically deal with what effect a “severability” clause might have on such an exclusion. In Minkler, the Supreme Court held that if the policy does contain a “severability” clause which states that the policy applies “separately to each insured,” the severability clause renders ambiguous an exclusion for intentional acts of “an” insured. As Minkler indicates, that ambiguity will be resolved in favor of the insured. In reaching that conclusion, the Minkler court rejected the rule followed by a majority of jurisdictions and instead adopted the rule followed in a minority of jurisdictions.

The Minkler court noted that an insurer can avoid the problem simply by changing the language of the severability clause from “[t]his insurance applies separately to each insured” to “[t]he limits of liability of this policy apply separately to each insured.” According to the Court, such language would make it clear that the severability clause’s purpose is merely “to extend the full individual indemnity limits to each person among several insureds under the same policy,” and “not to make exclusions from coverage individual rather than collective.” 

The Minkler court was also careful to stress that its reasoning and conclusion were aimed at the “specific circumstances of this case, which involves the interplay between a severability clause and an exclusion for the intentional acts of ‘an’ insured….” The Court emphasized that its conclusion in this case “does not mean a severability clause necessarily affects all exclusions framed in terms of ‘an’ or ‘any’ insured.” Rather, “each exclusion applicable to ‘an’ or ‘any’ insured must be examined individually, and in context, to determine the effect a severability clause like the one at issue here might have on its operation.”

In any event, after Minkler, it is clear that a standard “severability” clause will limit an insurer’s ability to rely on an exclusion for intentional acts of “an” insured to deny coverage for an “innocent insured.” 

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Automobile Policy "Step-Down" Provisions Limiting Coverage for Permissive Users Are Valid if They Are Conspicuous, Plain and Clear

The California Court of Appeal has held that an automobile liability policy’s “step-down” provision, which reduced liability limits for permissive users, was “conspicuous, plain and clear” and thus limited the coverage that was available to a permissive user. (Dominguez v. Financial Indem. Co. (2010) 183 Cal.App.4th 388)

Facts

Lucia Dominguez (Dominguez) was allegedly injured in an automobile accident caused by Ningju Qui (Qui). The vehicle Qui was driving was owned by, and used with the permission of, Michael Welch (Welch). Welch was the named insured on an auto policy issued by Financial Indemnity Company (FIC), and Qui as a permissive user also qualified as an insured on the FIC policy.

The FIC policy’s declaration page stated that the bodily injury liability limits were $100,000 each person and $300,000 each accident. However, the policy’s face sheet, table of contents and liability section all referred to a “Reduction in Coverage” on page 7 of the policy. On page 7, under a heading labeled “REDUCTION IN COVERAGE,” the policy limited coverage for permissive users to the minimum limits required by the applicable financial responsibility laws. In addition, the policy’s insuring agreement stated that “[t]he limits shown on the Declarations page are subject to reduction to the state mandatory minimum of $15,000 each person, $30,00 each accident … where there is a permissive user of the ‘insured vehicle.’”

Dominguez filed an action against Qui and Welch for her injuries arising out of the accident. While that action was pending, Dominguez also filed an action for declaratory relief action against FIC to obtain a determination as to what limits were available to the permissive user, Qui. FIC prevailed in the declaratory relief action, with the trial court concluding that the “step-down” permissive user limitation was sufficiently “conspicuous, plain and clear.” Dominguez appealed.

Holding

The Court of Appeal affirmed. Insurance Code §11580.1 (b)(4) provides that an automobile policy must provide the same coverage to a permissive user as is afforded the named insured, but only up to the limits of the Financial Responsibility Law. However, a policy which includes such a limitation on coverage and will be subjected to “close scrutiny.” The Court of Appeal noted that it is the insurer’s burden to make its coverage exclusions and limitations “conspicuous, plain and clear.” The court also observed that in interpreting an automobile policy’s permissive user limitations, the court must examine the reasonable expectations of the insured car owner, not the reasonable expectations of the permissive user.

The Court proceeded to hold that the permissive user limitation in the FIC policy was “conspicuous” and distinguished the limitation from that in Haynes v. Farmers Ins. Exch. (2004) 32 Cal.4th 1198 because of the location of the limitation in the FIC policy. According to the Court, the FIC policy notified the insured “early and often” that a permissive user had lower limits than the named insured. 

The Court also found the limitation “plain and clear” because the policy did more than simply state that a permissive user was only covered to the extent of the “Financial Responsibility Law.” On the first page of the FIC policy, the insuring agreement provided that the limits in the Declarations are subject to a reduction “to the state mandatory minimum of $15,000 each person, $30,000 each accident, and $5,000 for property damage when there is a permissive user of the insured vehicle.” According to the Court, that was “plain and clear.”

Comment

Provisions which limit the amount of coverage available to permissive users are subject to close judicial scrutiny. However, as this case makes clear, if an insurer uses language which is “conspicuous, plain and clear,” the insurer can in fact limit a permissive user to the statutory minimum limits.

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Court of Appeal Enforces Exclusion in Legal Malpractice Policy for Claims Made by Entities That Are Owned or Managed by the Insured

The California Court of Appeal has held that a legal malpractice policy’s exclusion for claims made by business entities that are owned or managed by the insured applies so long as the insured owned or managed the entity at the time the insured first gave notice of the claim to the insurer. (Car. Cas. Ins. Co. v. L.M. Ross Law Group, LLP (2010) 184 Cal.App.4th 196)

Facts

L.M. Ross Law Group, LLP (“Ross Law Group”) is a two-person law firm whose sole equity partner is Leonard M. Ross. Mr. Ross is both the settlor and trustee of the Leonard M. Ross Revocable Trust, which owns a majority interest in an entertainment company called Diversified Entertainment (“DEC”). As of 2005, Mr. Ross also served as DEC’s manager. 

In June 2005, DEC was sued for damages arising out of a distribution agreement it had entered into under the legal advice of Mr. Ross’ law firm, Ross Law Group. DEC in turn made a legal malpractice claim against Ross Law Group, claiming over $800,000 in damages.

Ross Law Group tendered the claim to its legal malpractice insurer, Carolina Casualty Insurance Company (“Carolina Casualty”), in September 2005. Significantly, Carolina Casualty’s “claims made” policy contained an exclusion for claims made by any business enterprise (other than the insured) in which the insured owned more than a 10% interest, or in which the insured was an owner, partner, or employee, or which was directly or indirectly controlled, operated, or managed by the insured.

DEC filed a legal malpractice lawsuit against Ross Law Group in December 2007. By that point, Mr. Ross was allegedly no longer the manager of DEC. Carolina Casualty agreed to defend Ross Law Group under a reservation of rights. The lawsuit ultimately settled for $250,000, with Ross Law Group contributing $175,000 and Carolina Casualty contributing $75,000 toward the settlement, and with each side reserving its right to recover the amount paid from the other party.

Carolina Casualty then filed the subject action against Ross Law Group. Finding that coverage was barred by the insured-controlled enterprises exclusion, the trial court granted Carolina Casualty’s motion for summary judgment. Ross Law Group appealed.

Holding

The Court of Appeal affirmed the judgment in favor of Carolina Casualty. To begin with, the Court held that the insured-controlled enterprises exclusion was triggered because Ross was DEC’s manger at the time the potential claim was reported in 2005. The Court rejected Ross Law Group’s argument that since Ross was no longer managing DEC when the actual lawsuit was filed in 2007, the exclusion did not apply. Instead, the Court found that conditions should be measured when the insured first gives notice of the potential claim to the insurer — i.e., in 2005 — because the policy expressly provides that claims “shall be deemed to have been made when notice was first given” to Carolina Casualty. The Court also noted that the mere fact that the exclusion was not drafted to expressly cover this specific fact pattern — i.e., where an insured lawyer managed the client when his firm notified the insurer of a potential claim but not when the actual action was filed — does not render the exclusion ambiguous.

The Court further found that the exclusion was also triggered because Mr. Ross, through his trust, had a majority interest in DEC. The Court explained that under California law, property held in a revocable inter vivos trust is deemed the property of the settlor. Since the Leonard M. Ross Revocable Trust was the majority owner of DEC, Mr. Ross himself was in effect the majority owner, thus triggering the exclusion.

Notably, the Court emphasized that its holding was consistent with the exclusion’s anti-collusion purpose. In essence, Ross was the real party on both sides of the claim: he asserted the legal malpractice claim on behalf of DEC, and he guided Ross Law Group’s response to that claim. As the Court noted, the potential for collusion under such circumstances is readily apparent.

Comment

The insured-controlled enterprises exclusion is not frequently litigated. This is the first reported California decision to elaborate on the relationship between the notice provisions of a “claims made” policy and the timing component of the exclusion.

 

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