Down To Cases

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

The subcontractor obtained premium financing for the policy. As part of the financing agreement, the subcontractor assigned its right to cancel the policy to the finance company, in the event the subcontractor did not pay its premium. On Nov. 25, 1997, on instructions from the premium finance company, the carrier canceled the policy for nonpayment of the premium. The general contractor was 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 and left the project. The city had another general contractor finish construction. In March 1999, the original general contractor sued the city, contending that the city's plans were defective. The city filed a cross-complaint, alleging among other things that the general contractor breached its contract and that its negligent work caused many defects in construction. The general contractor then filed a cross-complaint against its subcontractors, alleging that the construction defects the city had identified had been caused by the subcontractors' negligence.

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

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

The appeals court held that there was no possibility of coverage under the subcontractor's policy, since it was canceled on Nov. 25, 1997. Any damage caused by the subcontractor's work that fell within the scope of the city's cross-complaint occurred after that date. Therefore, said the appeals court, the trial court properly granted summary judgment to the insurer.

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

The court said that because of another part of the code, Section 673(i), the insurer wasn't obligated to inform the general contractor of the cancellation either. The court found that when an insurer terminates a policy after receiving a finance company's notice that it is exercising the insured's right to cancel a policy, the carrier has no further duty to effect cancellation.

The general contractor contended that Section 673(f) of the code required the carrier to notify it of the cancellation as a “third party.” Section 673(f) requires an insurer to notify governmental agencies, mortgagees, or other third parties when required by statute, regulation or contract. The general contractor said another part of the code, Section 677.2, created such a statutory requirement. But the appeals court said that section applied only to 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 the Legislature intended Section 673 to require insurers to provide notice of cancellation to persons named in additional insured endorsements, absent some independent contractual or legal requirement 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 wording problematic

A man was seriously injured in an automobile collision as he drove a personal vehicle while on business for a closely held corporation of which he was an owner, officer, director and employee. As a result of the accident, the man sustained severe and permanent injuries. The insurer of the other driver, who was found to be at fault, paid the $25,000 limits of its liability policy, while the driver's personal-auto insurer paid the $25,000 limits of its underinsured motorist coverage. The injured driver also attempted to obtain coverage under the corporation's auto insurance. 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 single insurer. Each policy provided underinsured motorists coverage up to a limit of $100,000 for injury to any one person and $300,000 per accident.

Both parties filed motions for summary judgment to determine whether the UIM coverage provisions in the corporation's insurance contracts covered injuries suffered by the plaintiff while he was driving a personal vehicle on company business. A trial court concluded they did not. The driver appealed.

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

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

The endorsement defined the term “insured person” as follows:

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

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

The driver argued that he was an insured under the UIM coverage endorsement because the policy was ambiguous. He conceded that the terms were not ambiguous on the surface but argued that they become so when applied to his corporation. He said that the UIM coverage endorsement applied to “bodily injury which an insured person is legally entitled to recover” and that, of course, the insured corporation cannot suffer bodily injury. “Hence, if these provisions were to be interpreted literally, there could never be any coverage afforded under the underinsured motorist provisions of this policy.”

But the appeals court held that the plaintiff's assertion was simply incorrect, in view of the fact that the injured driver and other employees would clearly be covered when driving the vehicles named in the policy in the course of the corporation's business. Under the policy definition of an insured person, no one individual would be covered, the court said, but it added that it cannot be said 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 to unnecessary 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 not change their meaning. The court recognized that some language in the definitions may be surplus when the named insured is a corporation.

The volume of litigation the court found nationally convinced it that the use of such terminology by insurance companies is problematic. A few courts have adopted a variation of the plaintiff's argument, the appeals court noted, but it added that the vast majority of jurisdictions in which this issue has been litigated have concluded that similar policy language is not ambiguous. (The states are Arizona, Colorado, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, and Washington.) Only a handful of jurisdictions, the court noted, find the language ambiguous and allow 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 the defendant's policy provided no coverage,” the appeals court said in confirming the trial court's summary judgment in favor of the carrier.

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 set awards

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

Among the many aspects of this case was the application of the standard prohibition against mentioning insurance coverage in a tort trial without instructing the jury to limit its consideration in setting damage awards. The psychologist contended that he had been unfairly prejudiced by the trial court's decision to permit a particular exhibit to be published to the jury during its deliberations. The exhibit was the renewal declarations page of a professional liability insurance policy held by the two professionals. The psychologist contended the jury considered the exhibit in setting a $5 million compensatory damages award, an amount the defendant said was unfair and unreasonable.

The appeals court held that not only should parts of the policy's declarations page have been redacted, but the jury also should have been instructed that the policy could be considered only for the purpose of determining whether the two psychologists were partners. The appeals court said the trial court's ruling concerning the use of the policy as an exhibit was also arbitrary and unreasonable and indicated a lack of careful consideration, since its practical effect was “to flaunt insurance coverage in the jury's face.” That is prohibited, the appeals court said, even when, as here, evidence of such coverage is admissible for another purpose.

The appeals court said the amount of damages the jury awarded the plaintiff likely was substantially higher than it would have been, had it been given proper limiting instruction. Therefore the appeals court reversed the decision and remand the case for a new trial 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 in Louisville, Ky. As an attorney, he consults on a variety of issues, including business formation and estate planning, for agencies and businesses in Kentucky. He can be reached at drenau@thepoint.net or, by fax, at (502) 805-0702.