18th Sep 2015

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Recent insurance industry attempt to limit “intentional acts” coverage by an exclusionary provision; Albert v. Mid-Century (2015) 236 Cal. App. 4th 1281

The insurance industry has recently attempted to limit otherwise covered-intentional acts by inserting a limitation  in a homeowners and/or CGL policy.  In order to comprehend the impact of this new limitation it is important that sections in this book [§ D24 DELIBERATE ACT [§ D24:01] and § I58 INTENTIONAL ACT [§ I58:001]] are reviewed in order to understand intentional acts coverage.

In Albert v. Mid-Century Ins. (2015) 236 Cal. App. 4th 1281, 1284-1285, the insured’s policy contained an exclusion for intentional acts.  The exclusion takes the form of an ILLUSTRATION, stating:

“[Exclusion] … property damage which is caused by, arises out of or is the result of an intentional act by or at the direction of the insured.

By way of example this includes, but is not limited to any intentional act or failure to act by an insured, whether
[a] criminal act or otherwise
[b] where the resulting injury or damage would be OBJECTIVELY expected to be a high degree of likelihood, even if not SUBJECTIVELY intended or expected
[c] this exclusion applies even if:  … an insured mistakenly believes he or she has the right to engage in certain conduct.
[d] …  any injury or damage is different or greater than that intended or expected.”

 ◆  OBSERVATIONAlbert v. Mid-Century Ins. attempts to eliminate coverages for intentional acts which are otherwise covered as established in California appellate court decisions.  This attempt to eliminate coverage is  by way of employing an ILLUSTRATION.  The question is whether this can be accomplished by use of a limitation described in an ILLUSTRATION.

Existing California law regarding intentional acts coverage

If an insurance policy term  (e.g. intentional) has been judicially construed, this construction should be read into the policy UNLESS the parties express a contrary intent.  [Cunningham v. Universal Underwriters (2002) 98 Cal. App. 4th 1141, 1150]  See § C89 CONSTRUING A POLICY [§ C89:3 Judicial construction of a term].  A limitation in a policy [§ L42 LIMITATION ON COVERAGE [§ L42:1 In general]] or an exclusion [§ E49 EXCLUSIONS [§ E49:13], [§ E49:13.02]], that takes away or limits coverage reasonably expected by the insured must be conspicuous, plain and clear to be enforceable.  [North American Building v. Fireman’s Fund Ins. (2006) 139 Cal. App. 4th 627, 642]  For the policy language to be plain and clear the limitation should be precise and understandable.  [Feurzeig v. Ins. Co. West (1997) 59 Cal. App. 4th 1276, 1283]  Words in the exclusion must be part of the vocabulary of an average person and must be part of the working vocabulary of average persons and must be phrased in a logical manner.  [Blasiar Inc. v. Fireman’s Fund (1999) 76 Cal. App. 4th 748]  Whether a coverage limitation is plain and clear is an issue of law, reviewed de novo.  [Brown v. Mid-Century Ins. (2013) 215 Cal. App. 4th 841, fn. 7]  See § P48 PLAIN AND CLEAR [§ P48:01 In general]; § L11 LAYMAN: CONSTRUCTION OF POLICY PROVISIONS [§ L11:2].  The policy should be read as a layman would read it and not as it might be analyzed by an attorney or an insurance expert.  [Canadian Ins. v. Ehrlich (1991) 229 Cal. App. 3d 383, 392]  See § L11 LAYMAN: CONSTRUCTION OF POLICY PROVISIONS [§ L11:9 Factors that a layman can consider in establishing coverage].

Existing California insurance law regarding coverage for intentional acts

The California Supreme Court holds that many intentional acts otherwise thought to be tortious are covered under a liability policy.  [Gray v. Zurich (1966) 65 Cal. 2d 263, fn. 12]  An insured performing “acts or activities” intentionally WILL HAVE COVERAGE for an accident in the absence of a finding that the insured intended to cause damages [consequential damages].  [Hogan v. Midland National Ins. (1970) 3 Cal. 3d 553, 561]  See § I58 INTENTIONAL ACT [§ I58:03 Deliberate acts which are excluded; § I58:1 Categories of intentional acts; some are covered, some are not covered, above.  This coverage for intentional acts looks to the subjective intent of the insured].  [Gonzalez v. Fire Ins. Exchange (2015) 234 Cal. App. 4th 1220, 1239]   See § E54 EXPECTED OR INTENDED ACT [§ E54:01 In general].

The ILLUSTRATION in Albert v. Mid-Century Ins. (2015) 236 Cal. App. 4th 1281, 1284-1285 is NOT “plain and clear” and therefore cannot change existing law

The ILLUSTRATION in Albert v. Mid-Century Ins. attempts to change the law by use of modifying legal concepts with words not understood by the average person in the context used in the ILLUSTRATION.  The words used are understood only by knowledgeable coverage attorneys or experts.  These attempts are as follows:

1.    The ILLUSTRATION attempts to eliminate certain coverages for CRIMINAL ACTS, see § C150 CRIMINAL ACTS [§ C150:2 Homeowners policy containing liability coverage], by excluding:  “… a criminal act or otherwise”.  (emphasis added)

2.    The ILLUSTRATION limits the act which “… [results] in an injury or damage [that] would be OBJECTIVELY expected to a high degree even if not SUBJECTIVELY intended or expected.”  This use of language as it affects coverage is language of attorneys and courts and not of the ordinary average person.  This attempt is an effort to bring back the historical rejection of OBJECTIVE STANDARDS as a basis for determining coverage for intentional acts.  The “objective” view of fortuity has largely been abandoned in favor of a “subjective” view under which an event is fortuitous if it is contingent, i.e. unknown to the parties at the inception of the policy.  [Sabella v. Wisler (1963) 59 Cal. 2d 21, 34, discussed at § L8 LATENT DEFECT EXCLUSIONS [§ L8:2 Historical meaning].  Under existing law the ordinary and popular meaning of the term “expected or intended act” connotes subjective knowledge of or belief in an event’s probability.  The degree of probability under existing law may be expressed as substantially certain, practically certain, highly or likely, or highly probable.  Under existing law it is error for a court to consider whether the terms “expect or intent” denote that the insured “should have known” as opposed to what the insured “knew”.  A “should have known” standard is without support in California law.  [Shell Oil v. Winterthur Swiss Ins. (1993) 12 Cal. App. 4th 715, 747, discussed at § E54 EXPECTED OR INTENDED ACT [§ E54:01 In general]]  The subjectively intended standard has been followed and approved recently in Gonzalez v. Fire Ins. Exchange (2015) 234 Cal. App. 4th 1220, 1239.  For a discussion of existing confusion in the California courts, which confusion was caused by historical error of a California court following a Washington appellate decision which has since been overruled by the Washington Supreme Court, see discussion at § I58 INTENTIONAL ACT [§ I58:001 In general], above.

3.    The ILLUSTRATION eliminates coverage for intentional acts even if the insured mistakenly believes he or she has the right to engage in certain conduct.  This changes existing California law.  See Firco v. Fireman’s Fund (1959) 173 Cal. App. 2d 524 (deliberate act of trespass coupled with insured’s “mistaken” belief that he had right to enter property).  See discussion at § T47 TREES; WRONGFUL CUTTING.

4.    The ILLUSTRATION attempts to limit intentional acts coverage, excluding:  “… an injury or damage [that is] different or greater or of a different quality than that intended or expected”.  This is an attempt by Albert v.  Mid-Century to eliminate “unexpected consequences”, presently covered.  The Supreme Court in Hogan v. Midland National Ins. (1970) 3 Cal. 3d 553, 559 quoted Geddes & Smith v. St. Paul (1959) 51 Cal. 2d 558, 563-564 regarding the definition of accident by stating:  “… accident is … an unexpected, unforeseen, or undesigned happening or consequence of an act from either a known or unknown cause”.  The ILLUSTRATION is contrary to the Supreme Court holding in Hogan on this issue.  A layman would likely not know this.

Conclusion:

A provision is not “clear and conspicuous” where its purpose is to change law, which purpose would be outside the knowledge of a layman.  The ILLUSTRATION in Albert v. Mid-Century attempts to render intentional acts unenforceable without specifying specific risks not intended to be covered in the policy.  Under the ILLUSTRATION the only intentional acts not covered are those resulting in injury or damage not OBJECTIVELY expected, even if not SUBJECTIVELY intended or expected, and not covering injury or damage that is different or greater than that expected.  Thus, the intentional act that would potentially be covered would only be a small limited amount of acts only identifiable after the act takes place.   This standard renders a policy illusory.  [See Safeco Ins. v. Robert S. (2001) 26 Cal. 4th 758 (holding “illegal acts” exclusion unenforceable because it was not clear as to what illegal the exclusion was referring to, criminal or civil)]

Judicial construction of the term “intentional act” as it relates to coverage is incorporated into the policy unless the parties otherwise agree to the contrary.  [Cunningham v. Universal Underwriters (2002) 98 Cal. App. 4th 1141, 1150]   An insured does not “agree” to the contrary where the limiting policy provision is not plain and clear to the average mind or layman.  The above legaleze in the ILLUSTRATION is an attempt to change the meaning of the law as it relates to “intentional act” as opposed to advising an insured what specific acts are excluded.

It is not clear whether the holding in Albert v. Mid-Century is an interpretation of the above ILLUSTRATION or is a holding based upon the erroneous understanding and historical meaning of the term “intentional act”, which meaning is discussed at § I58 INTENTIONAL ACT [§ I58:001 In general]. 

References in bold are to Mr. Cornblum’s legal text CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE (2015), published by ThomsonReuters (1-800-344-5008).  Those with WestLaw can search using the database CAINLAWDDR

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