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Insurance Law News - September 2014

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Policy Which Describes Tractor Portion of Tractor/Trailer Rig Is "Primary" to Policy Which Does Not Describe Any Portion of Rig

Pursuant to California Insurance Code section 11580.9, a policy which specifically described the tractor portion of a tractor/trailer rig was "primary" to another policy which did not describe any portion of the rig. (Scottsdale Indemnity Co. v. National Continental Insurance Co. (2014) 2014 WL 4636895)


Manuel Lainez was a commercial trucker who owned a 1999 Freightliner tractor (i.e., power unit). Lainez purchased a trucker's liability policy from Scottsdale Indemnity Company (Scottsdale) with a $1 million liability limit. The Scottsdale policy specifically described and rated the 1999 Freightliner, and covered any attached trailer.

Western Transportation Services, LLC (Western Transportation) was a company which did not own tractors or trailers, but which contracted with owner/operators and arranged for them to pick up and deliver loads to various customers. Western Transportation entered into a motor carrier agreement with Lainez pursuant to which Lainez agreed to haul goods for Western Transportation. Western Transportation obtained a commercial assigned risk policy from National Continental Insurance Company (NCI). The NCI policy described Western Transportation's business as "trucker for hire-excess" and named Lainez as a driver. However, the NCI policy did not list, describe, or rate any vehicle.

Lainez was hauling goods for Western Transportation in his 1999 Freightliner tractor with an attached 1984 Hyundai box trailer when he was involved in a fatal collision with Constancio Barcenas. Barcenas' heirs later filed various wrongful death actions against Lainez and Western Transportation.

NCI tendered Lainez's and Western Transportation's defense to Scottsdale. Initially Scottsdale agreed that Scottsdale was the "primary" insurer, and that Scottsdale would defend Lainez and Western Transportation and indemnify them up to the limits of the Scottsdale policy. However, two years later Scottsdale reversed course, asserted that NCI was a "co-primary" insurer, and demanded that NCI reimburse Scottsdale for a pro rata share of the defense costs. NCI rejected Scottsdale's demand.

At a subsequent mediation, Barcenas' heirs settled their wrongful death claims against Lainez and Western Transportation for a total of $675,000, with Scottsdale contributing $475,000 and NCI contributing $200,000. As part of the settlement, Scottsdale and NCI each reserved rights against the other.

Scottsdale then filed a contribution action against NCI. On cross-motions for summary judgment, the trial court ruled in favor of NCI and against Scottsdale. Scottsdale appealed.


The Court of Appeal affirmed. Pursuant to California Insurance Code section 11580.9(d), when two or more policies apply to the same motor vehicle or motor vehicles involved in an accident, the policy which describes or rates the vehicle is "primary" and any other policy is "excess." Here, only Scottsdale's policy described or rated any vehicle, namely, Lainez's 1999 Freightliner tractor. Because Scottsdale's policy specifically described the 1999 Freightliner tractor, which was part of the tractor/trailer "rig," section 11580.9(d) applied. Thus, Scottsdale's policy was primary and NCI's policy was excess.

Scottsdale argued that the priority of coverage should be governed not by section 11580.9(d), but rather by section 11580.9(h). Subdivision (h) provides that when two or more policies apply to a tractor and an attached trailer, and one policy affords coverage to an insured who is a trucker and who is operating the tractor, that policy shall be primary for both the tractor and trailer, and any other policy shall be excess. Scottsdale argued that because both the Scottsdale policy and the NCI policy covered the tractor and the trailer, and because Lainez and Western Transportation were both truckers, the Scottsdale policy and the NCI policy were "co-primary" under subdivision (h). The appellate court disagreed, reasoning that subdivision (h) was only intended to apply when one policy covers a tractor and another policy covers the trailer. Subdivision (h) did not apply in a situation such as this, where both policies covered the entire tractor/trailer rig.


According to the appellate court, the conclusive presumption set forth in subdivision (h) was intended to resolve coverage disputes between insurers of tractors and insurers of trailers. There was nothing in the statute or the legislative history to suggest that subdivision (h) applies when two policies provide coverage to the entire rig. The appellate court thus concluded that subdivision (d) was the more specific subdivision that applied, thereby rendering the Scottsdale policy "primary" and the NCI policy "excess."

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Whether Producer Was "Broker" or "Agent" Was Question of Fact Where Insurer Sought to Rescind Due to Misrepresentations on Application

Whether a producer was a "broker" (acting on behalf of the insured) or an "agent" (acting on behalf of the insurer) was a question of fact where the insurer sought to rescind due to misrepresentations on the application. (Douglas v. Fidelity National Insurance Co. (2014) 2014 WL 4261346)


Jerry and Betty Douglas owned a residence and sought to insure it. Thus, Mr. Douglas contacted InsZone Insurance Services, Inc., an insurance "producer." (A "producer" is a generic term for someone who, depending on the facts, is a "broker" or an "agent.")

Fidelity National Insurance Company is an insurer that utilizes an internet-based underwriting and rating system. The system is designed so that a producer can submit an application consisting of 43 questions, and receive an instantaneous notification from Fidelity that the application has been accepted or rejected. If Fidelity accepts the application, the producer is supposed to print a copy and obtain the applicant's signature.

Using this internet-based application process, InsZone transmitted to Fidelity an application that contained factually-inaccurate information about several issues. If the application had contained accurate information, Fidelity's system immediately would have rejected the application. Instead, however, based on the inaccurate information, Fidelity's system immediately accepted Mr. and Mrs. Douglas' application.

After Fidelity issued the policy, a fire caused substantial damage to Mr. and Mrs. Douglas' residence and various items of their personal property. While investigating the claim, Fidelity discovered that the application InsZone had submitted on behalf of Mr. and Mrs. Douglas contained several factually-inaccurate answers. Thus, Fidelity notified Mr. and Mrs. Douglas that Fidelity was rescinding the policy, and Fidelity sent Mr. and Mrs. Douglas a check to refund the premium payment they had made.

After Fidelity purported to rescind the policy, Mr. and Mrs. Douglas filed suit against both Fidelity and InsZone. Mr. Douglas asserted that, during the application process, he had signed a blank application at the behest of an InsZone employee. Mr. Douglas also asserted that InsZone's employee had only asked Mr. Douglas three questions (not 43 questions).

The case proceeded to a jury trial, during which a central issue was whether InsZone was Fidelity's "agent" or Mr. and Mrs. Douglas' "broker." The jury awarded a substantial verdict (including contractual damages, bad faith damages and punitive damages) against Fidelity. Although the judge later struck the award of punitive damages, the remainder of the award exceeded $800,000. Fidelity appealed, as did Mr. and Mrs. Douglas.


The Court of Appeal reversed, finding that the trial judge had erroneously instructed the jury on the issue of whether InsZone was a "broker" (who was acting on behalf of Mr. and Mrs. Douglas) or an "agent" (who was acting on behalf of Fidelity).

The appellate court noted that an insured is responsible for the contents of an application submitted by a broker. Thus, the jury should have been allowed to determine whether InsZone was acting as Mr. and Mrs. Douglas' "broker" or Fidelity's "agent." If InsZone was Mr. and Mrs. Douglas' "broker" at the time of the application, then Fidelity would not be legally responsible for any errors Mr. and Mrs. Douglas claimed InsZone had made (e.g., having Mr. Douglas sign blank forms, failing to ask all questions on the application, etc.).

The appellate court observed that whether a producer is a "broker" or an "agent" is often a question of fact. Generally, a producer is deemed to be an "agent" if (1) the insurer has filed with the California Department of Insurance a notice appointing the producer as an agent; or (2) the insurer and the producer have entered into a written agreement that authorizes the producer to bind coverage. Here, there was no evidence that Fidelity had filed with the California Department of Insurance a notice appointing InsZone as an agent. Further, the Court of Appeal noted that InsZone apparently did not have authority to bind coverage and that, instead, it was Fidelity itself (through its internet-based application system) that had approved the application.

Because the issue of whether InsZone was a "broker" or "agent" was a material question of fact, the jury should have been presented with properly-crafted jury instructions and allowed to decide this factual issue. Thus, the Court of Appeal reversed the judgment and ordered a new trial.


Under California law, it is well established that material misrepresentations or concealments in an application for insurance entitle an insurer to rescind, even if the misrepresentations are not intentionally made. In addition, it is well established that an insurer has no responsibility for a misrepresentation that is attributable to a broker, but that an insurer may have responsibility where the misrepresentation is attributable to an agent.

If the insurer has filed a notice of appointment with the Department of Insurance, the producer will be deemed an agent as a matter of law. In addition, if the insurer has granted the producer authorization to bind coverage, the producer will be deemed to be an agent as a matter of law. In most other cases, the issue of whether the producer is an "agent" or a "broker" will present a question of fact.


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Employment-Related Practices Exclusion Relieves General Liability Insurer of Duty to Defend Insured Employer Against Suit Arising from Alleged Strip Search of Employees

An "employment-related practices" exclusion relieved a commercial general liability insurer of any duty to defend an insured employer against a suit arising from an alleged "strip search" of its employees. (Jon Davler, Inc. v. Arch Insurance Co. (2014) 2014 WL 4185860)


Jon Davler, Inc. is a cosmetics company. One of Jon Davler's managers, Christina Yang, became very upset when she found a used sanitary napkin by the toilet in the women's bathroom. Yang thus confronted several of the company's female employees and demanded to know who was on their menstrual period so that Yang could determine who had left the used sanitary napkin by the toilet. When the female employees denied being on their menstrual cycle, Yang required the employees to go into the restroom and pull down their pants and underwear so that Yang could determine who was menstruating. Yang told the female employees that if they did not comply, they would be fired. The female employees complied.

Three of the female employees later sued Jon Davler and Yang for sexual harassment, failure to prevent sexual harassment, invasion of privacy, intentional infliction of emotional distress and false imprisonment. In their cause of action for false imprisonment, the employees alleged that they "were wrongfully detained and confined by [Jon Davler and Yang] in the bathroom for the purpose of conducting a humiliating and wrongful inspection of their vaginal area to determine if they were on their menstrual period."

Jon Davler and Yang sought coverage under Jon Davler's commercial general liability policy issued by Arch Insurance Company. The Arch policy covered damages because of various "personal and advertising injury" offenses, including "false arrest, detention or imprisonment...." However, the policy also contained an "employment-related practices exclusion," which stated that there was no coverage for personal injury "arising out of" any refusal to employ a person, termination of a person's employment, or "employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or malicious prosecution directed at that person...." Citing the policy's employment-related practices exclusion, Arch refused to defend or indemnify Jon Davler and Yang against the employees' lawsuit.

Jon Davler subsequently sued Arch for breach of contract and bad faith. However, the trial court ruled that all of the claims asserted against Jon Davler in the underlying action fell within the employment-related practices exclusion in the Arch policy, and that Arch thus had no duty to defend Jon Davler in the underlying action. Jon Davler appealed.


The Court of Appeal affirmed, holding that the policy's employment-related practices exclusion relieved Arch of any duty to defend Jon Davler against the employees' lawsuit.

The appellate court rejected Jon Davler's argument that the exclusion's use of the term "such as" required that any excluded acts be similar to "coercion, demotion, evaluation," etc., and that "false imprisonment" was not similar to such acts.  According to the appellate court, "such as" is not a term of limitation but rather contemplates additional matters not specifically enumerated. Further, "false imprisonment" was sufficiently similar to several of the listed acts, including "coercion," "discipline" and "harassment."

The appellate court also rejected Jon Davler's argument that the exclusion's "arising out of" language rendered the exclusion ambiguous. According to the court, the term "arising out of" only requires a "minimal causal connection" between the injury and the excluded activity. Here, the "arising out of" requirement was easily met. Indeed, the only reason the employees were forced into the bathroom for inspection was that they were employed by Jon Davler; were following a directive from a supervisor at their place of employment; and would lose their jobs if they did not comply with the inspection demand.

Last, the appellate court rejected Jon Davler's argument that an ambiguity was created by the presence of "false imprisonment" in the coverage provision and its absence in the exclusion. According to the appellate court, the employment-related practices exclusion provides a non-exhaustive list of examples of employment-related practices, policies, acts or omissions, so that other practices, policies, acts or omissions (e.g., false imprisonment) may qualify as employment-related. In reaching that conclusion, the appellate court disagreed with the federal district court's contrary decision in Zurich Ins. Co. v. Smart & Final, Inc. (C.D. Cal. 1998) 996 F. Supp. 979, and stated that the federal district court had "missed the mark."


A general liability policy's employment-related practices exclusion will generally bar coverage for claims arising in the employment setting. Thus, courts have generally held that the exclusion will bar coverage for an insured's alleged liability arising from unlawful strip search of an employee at the workplace. (See, e.g., LDF Food Group, Inc. v. Liberty Mutual Fire Ins. Co. (Kan. 2006) 146 P.3d 1088, 1095 and Cornett Management Co., LLC v. Fireman's Fund Ins. Co. (4th Cir. 2009) 332 Fed.Appx. 146, 147.)

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