In January 1997, a general contractor entered into a contractwith the City of Los Angeles Harbor Department for the constructionof a community center. A subcontractor on the project had aliability policy with a policy period running from Sept. 5, 1997,to Sept. 5, 1998. The policy had an endorsement making the generalcontractor an “insured” for any liability arising out of thesubcontractor's work for the general contractor.

The subcontractor obtained premium financing for the policy. Aspart of the financing agreement, the subcontractor assigned itsright to cancel the policy to the finance company, in the event thesubcontractor did not pay its premium. On Nov. 25, 1997, oninstructions from the premium finance company, the carrier canceledthe policy for nonpayment of the premium. The general contractorwas not informed of the cancellation.

The subcontractor continued to work on the project until July 8,1998, when the general contractor terminated it. In November 1998,the general contractor terminated its contract with the city andleft the project. The city had another general contractor finishconstruction. In March 1999, the original general contractor suedthe city, contending that the city's plans were defective. The cityfiled a cross-complaint, alleging among other things that thegeneral contractor breached its contract and that its negligentwork caused many defects in construction. The general contractorthen filed a cross-complaint against its subcontractors, allegingthat the construction defects the city had identified had beencaused by the subcontractors' negligence.

To fund its defense to the city's cross-complaint, the generalcontractor tendered its defense not only to its own liabilitycarriers, but also to its subcontractors' insurers, relying on itsstatus as an additional insured under their policies. The generalcontractor's liability carriers and those for several of thesubcontractors agreed to defend. The terminated subcontractor'sinsurer, however, denied the tender on various grounds, includingthat no property damage covered by its policy had occurred whileits policy was in force.

The general contractor filed a cross-complaint against theinsurer, seeking damages for its failure to help fund its defenseto the city's cross-complaint. A trial court granted summaryjudgment in favor of the insurer, however. The general contractorappealed.

The appeals court held that there was no possibility of coverageunder the subcontractor's policy, since it was canceled on Nov. 25,1997. Any damage caused by the subcontractor's work that fellwithin the scope of the city's cross-complaint occurred after thatdate. Therefore, said the appeals court, the trial court properlygranted summary judgment to the insurer.

The general contractor argued that because it was not notifiedthat the subcontractor's policy had been canceled, the policy'scoverage for the general contractor, as an additional namedinsured, did not terminate. The court, however, said that Section673 of the California Insurance Code, which governs a lender'scancellation of an insurance policy for nonpayment of premium,provided otherwise. Under Section 673(d), the “insured” entitled tosuch notice from a lender is “the person who has purchased orarranged to purchase an insurance contract and who enters into apremium finance agreement with a premium finance agency.” The term“insured” does not encompass an additional named insured like thegeneral contractor, the appeals court said.

The court said that because of another part of the code, Section673(i), the insurer wasn't obligated to inform the generalcontractor of the cancellation either. The court found that when aninsurer terminates a policy after receiving a finance company'snotice that it is exercising the insured's right to cancel apolicy, the carrier has no further duty to effect cancellation.

The general contractor contended that Section 673(f) of the coderequired the carrier to notify it of the cancellation as a “thirdparty.” Section 673(f) requires an insurer to notify governmentalagencies, mortgagees, or other third parties when required bystatute, regulation or contract. The general contractor saidanother part of the code, Section 677.2, created such a statutoryrequirement. But the appeals court said that section applied onlyto termination of a policy other than at an insured's request.Thus, the court said, it was irrelevant here.

“Nothing in the legislative history suggests that theLegislature intended Section 673 to require insurers to providenotice of cancellation to persons named in additional insuredendorsements, absent some independent contractual or legalrequirement for such notice,” the court said.

The trial court's ruling was upheld.

Gorham Co. Inc. v. First Financial Insurance Co., No.B183477 (Cal.App. Dist.2 05/30/2006) 2006.CA.0004447(www.versuslaw.com).

Court upholds UIM endorsement but finds wordingproblematic

A man was seriously injured in an automobile collision as hedrove a personal vehicle while on business for a closely heldcorporation of which he was an owner, officer, director andemployee. As a result of the accident, the man sustained severe andpermanent injuries. The insurer of the other driver, who was foundto be at fault, paid the $25,000 limits of its liability policy,while the driver's personal-auto insurer paid the $25,000 limits ofits underinsured motorist coverage. The injured driver alsoattempted to obtain coverage under the corporation's autoinsurance. When the insurer denied the claim, the driver sued.

The injured driver's corporation owned seven motor vehicles,which were covered by seven identical policies issued by a singleinsurer. Each policy provided underinsured motorists coverage up toa limit of $100,000 for injury to any one person and $300,000 peraccident.

Both parties filed motions for summary judgment to determinewhether the UIM coverage provisions in the corporation's insurancecontracts covered injuries suffered by the plaintiff while he wasdriving a personal vehicle on company business. A trial courtconcluded they did not. The driver appealed.

The UIM coverage endorsement in the corporation's business autopolicies provided, in part:

“We will pay compensatory damages for bodily injury which aninsured person is legally entitled to recover from the owner oroperator of an underinsured motor vehicle. The bodily injury mustbe sustained by an insured person and must be caused by accidentand arise out of the use of the underinsured motor vehicle.”

The endorsement defined the term “insured person” asfollows:

“1. Insured person means: a. You or a relative. b. Anyone elseoccupying your insured car. c. Anyone, other than a person ororganization claiming by right of assignment or subrogation,entitled to recover damages due to bodily injury to you, a relativeor another occupant of your insured car.”

The policy's general definitions section stated: “'You' and'your' mean the policyholder named in the declarations.” Thedeclaration page identified the policyholder and named insured asthe corporation. The policy defined a relative as “a person livingin your household, related to you by blood, marriage or adoption.”The endorsement also provided that UIM coverage did not apply forbodily injury to a person “while occupying, or when struck by, amotor vehicle that is not insured under this policy, if it is ownedby you or any resident of your household.”

The driver argued that he was an insured under the UIM coverageendorsement because the policy was ambiguous. He conceded that theterms were not ambiguous on the surface but argued that they becomeso when applied to his corporation. He said that the UIM coverageendorsement applied to “bodily injury which an insured person islegally entitled to recover” and that, of course, the insuredcorporation cannot suffer bodily injury. “Hence, if theseprovisions were to be interpreted literally, there could never beany coverage afforded under the underinsured motorist provisions ofthis policy.”

But the appeals court held that the plaintiff's assertion wassimply incorrect, in view of the fact that the injured driver andother employees would clearly be covered when driving the vehiclesnamed in the policy in the course of the corporation's business.Under the policy definition of an insured person, no one individualwould be covered, the court said, but it added that it cannot besaid that the policy did not afford any UIM coverage.

Because the policy was issued to a corporation, its terminology,which applies only to individuals, seems likely to lead tounnecessary litigation, the court said. The policy's definitions,however, are clear on the meaning of these terms, the court said,and the fact that the named insured is a corporation does notchange their meaning. The court recognized that some language inthe definitions may be surplus when the named insured is acorporation.

The volume of litigation the court found nationally convinced itthat the use of such terminology by insurance companies isproblematic. A few courts have adopted a variation of theplaintiff's argument, the appeals court noted, but it added thatthe vast majority of jurisdictions in which this issue has beenlitigated have concluded that similar policy language is notambiguous. (The states are Arizona, Colorado, Florida, Georgia,Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine,Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, NewMexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, SouthCarolina, Tennessee, Texas, and Washington.) Only a handful ofjurisdictions, the court noted, find the language ambiguous andallow coverage. (The states are Connecticut, Mississippi, Montana,New Jersey, Ohio and Vermont.)

“We find there is a split among the jurisdictions on this issue,but we conclude that the majority and better view is that thedefendant's policy provided no coverage,” the appeals court said inconfirming the trial court's summary judgment in favor of thecarrier.

Hillabrand v. American Family Mutual Insurance Co., 271 Neb.585 (Neb. 05/12/2006) 271 Neb. 585, 2006.NE.0000135(www.versuslaw.com).

Juries cannot use evidence of insurance to setawards

A psychologist was sued by a former patient, who had been thevictim of severe sexual abuse perpetrated by her adoptive father.She alleged the psychologist was liable for the negligence of hispartner, also a licensed psychologist, who had treated theplaintiff's father and knew of his proclivity to sexually abuse herbut had failed to warn anyone of the danger the plaintiff's fatherposed to her. A jury awarded the plaintiff more than $10 million,including $5 million in compensatory damages. The psychologistappealed.

Among the many aspects of this case was the application of thestandard prohibition against mentioning insurance coverage in atort trial without instructing the jury to limit its considerationin setting damage awards. The psychologist contended that he hadbeen unfairly prejudiced by the trial court's decision to permit aparticular exhibit to be published to the jury during itsdeliberations. The exhibit was the renewal declarations page of aprofessional liability insurance policy held by the twoprofessionals. The psychologist contended the jury considered theexhibit in setting a $5 million compensatory damages award, anamount the defendant said was unfair and unreasonable.

The appeals court held that not only should parts of thepolicy's declarations page have been redacted, but the jury alsoshould have been instructed that the policy could be consideredonly for the purpose of determining whether the two psychologistswere partners. The appeals court said the trial court's rulingconcerning the use of the policy as an exhibit was also arbitraryand unreasonable and indicated a lack of careful consideration,since its practical effect was “to flaunt insurance coverage in thejury's face.” That is prohibited, the appeals court said, evenwhen, as here, evidence of such coverage is admissible for anotherpurpose.

The appeals court said the amount of damages the jury awardedthe plaintiff likely was substantially higher than it would havebeen, had it been given proper limiting instruction. Therefore theappeals court reversed the decision and remand the case for a newtrial on the issue of damages only.

Pope v. Pope, No. WD63997 (Mo. App. W.D. 12/20/2005) 2005.MO. 0001795 (www.versuslaw.com).

Don Renau is a retired agent and practicing attorney inLouisville, Ky. As an attorney, he consults on a variety of issues,including business formation and estate planning, for agencies andbusinesses in Kentucky. He can be reached at [email protected], by fax, at (502) 805-0702.