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Insurance Policy Interpretation: Supreme Court at a Crossroads?
The George court has been going strong since 1996, slowly but surely assuming a personality distinct from that of its predecessor under Malcolm Lucas. In particular, the current justices appear to be inching away from some of the Lucas court's pronouncements on how to read and interpret an insurance policy. Because so much California litigation is funded, directly or indirectly, by insurers, any changes about insurance policy interpretation could affect an enormous segment of our litigious society.
In 1992, the Lucas court announced a new three-step test on how to construe insurance contracts. First, if the meaning of a policy term is plain, it governs (nothing surprising there). But second, if the term is potentially ambiguous, courts no longer automatically construe it against the drafter; instead, viewing the policy language in context and as a whole, they must determine if the insured had an objectively reasonable expectation of coverage. Finally, if, and only if, the court cannot determine reasonable expectation, it construes the ambiguous term against the drafter. Bank of the W. v Superior Court (1992) 2 C4th 1254, 10 CR2d 538. Insertion of the second step, the "reasonable expectations test," was a radical departure from prior law. Before 1992, if a court found a policy term ambiguous, it was construed against the insurer as a matter of course. By all accounts, the new second step significantly reduced the number of cases in which coverage was found for insurance claims.
Hints that the George court might be distancing itself from Bank of the West first surfaced two years ago, in Safeco Ins. Co. v Robert S. (2001) 26 C4th 758, 26 CR2d 758. There, the teenage insured had borrowed his mother's gun, and, thinking he had unloaded the weapon, aimed and fired at a friend, killing him instantly. The insured was found guilty of involuntary manslaughter. The policy in issue excluded coverage for "illegal acts." Robert S. noted that "illegal acts" could be read to mean either any act prohibited by law, or only those that are criminal. In other words, it found the term ambiguous. The 4-2 majority, after a pro forma recitation of Bank of the West's rules, seemingly ignored them. Instead of asking if the insured had a reasonable expectation of coverage, or interpreting the exclusion narrowly (as limited to illegal criminal acts) to comport with that expectation, the court declined to enforce the exclusion at all because it was too broad, i.e., it excluded negligent illegal acts as well as criminal ones. But as noted by Justice Baxter, joined by Justice Brown in dissent, the term "illegal acts," even though ambiguous in the abstract, was not ambiguous if the reasonable expectations test was applied to these facts: An insured "found guilty of criminal homicide . . . could hardly expect that his or her tort liability for the killing somehow falls outside an explicit exclusion for 'illegal acts.'" 26 C4th at 768.
When Robert S. came down, some commentators, including this one, debated whether the opinion heralded incipient changes in the court's approach to construing insurance policies. The reasonable expectation test, which had dominated insurance opinions for a decade, appeared to be overlooked in deed if not in word, and replaced, at least in this case, by the view that an overbroad exclusion will not be enforced regardless of reasonable expectations. Others thought the opinion was sui generis, a result-oriented decision fueled by the majority's obvious belief that the shooting, though technically criminal, was actually a tragic "accident" more akin to negligence than crime. See Imre, "What a Difference a Word Makes: High Court Declines To Apply "Illegal Acts" Exclusion," 23 CEB Civ LR 191 (Sept. 2001).
In the ensuing two years, the Cassandra-like predictions of forthcoming change appeared ill-founded, as the court repeatedly applied Bank of the West in its traditional formulation. See, e.g., Kazi v State Farm Fire & Cas. Co. (2001) 24 C4th 871, 103 CR2d 1; Certain Underwriter's at Lloyd's of London v Superior Court (2001) 24 C4th 945, 103 CR2d 672. As recently as mid-2003, the George court issued an opinion that reaffirmed Bank of the West's methodology, but with an interesting twist at the end from three of the seven justices. In Rosen v State Farm Gen. Ins. Co. (2003) 30 C4th 1070, 135 CR2d 361, the high court held that public policy cannot be used to trump unambiguous contract language clearly barring coverage for the claim. The homeowners policy in issue provided coverage only for "actual collapse" of structures. "Actual collapse" was defined as "actually falling down or fallen to pieces." The court of appeal, although acknowledging that this language was plain and clear, nonetheless held that the insurer owed coverage for a structure in danger of "imminent" (as opposed to the required "actual") collapse, relying on considerations of "public policy" to invalidate the actual collapse requirement, and concluding that an insured should not be required to await actual collapse and the potential endangerment of lives or other property before being entitled to coverage.
Reaffirming Bank of the West, the supreme court majority roundly rejected the notion that a judge's individual idea of what is "fair" can override a clear insurance contract exclusion: "We do not rewrite any provision of any contract, [including an insurance] policy, for any purpose." 30 C4th at 1073 (citation omitted). Any other rule would render even the clearest contract language uncertain in its application and make predictability in insurance claims disputes problematic at best. Had the court stopped there, that would have been evidence of business as usual. But it didn't. Justice Moreno, the newest member of the court, penned a concurrence, joined by veterans Kennard and Werdegar. The concurrence acknowledged that an insured has a high burden when trying to use "public policy" to override contract language, but added that it is possible to do so in the appropriate case. Still more noteworthy, the concurring justices were not willing to limit the potential trump card of "public policy" to that expressed in a statute or regulation: "The public policy in question may sometimes be based on statute [citation], but does not necessarily have to be - it can be based on other policies perceived to be contrary to the public welfare." 30 C4th at 1081. In other words, the concurrence agreed in principle with the lower court, but found that the public policy considerations advanced did not meet the insured's burden. Because the concurrence was unnecessary to the decision, it seems that three justices have gone out of their way to serve notice that, in the appropriate situation, the "public policy trump card" may still be in play. It suggests a coming retrenchment on Bank of the West's rule that plain policy language governs, period. It only takes four to make a majority.
Finally, just three months ago, the high court employed another unusual approach to policy language analysis. Justice Moreno, writing for a unanimous court, held in MacKinnon v Truck Ins. Exch. (2003) 31 C4th 635, 3 CR3d 228, that an absolute pollutants exclusion in a liability policy did not apply to a death claim resulting from negligent spraying of insecticides in an apartment complex. The exclusion in question barred coverage for the dispersal, release, or discharge of "pollutants." "Pollutants" was defined, among other things, as any "irritant or contaminant." The insurer argued that the insecticide qualified as an "irritant" or "chemical."
MacKinnon concluded that the general language of the liability policy established a reasonable expectation of coverage for ordinary acts of negligence and that an insured would not expect insecticide spraying to be excluded. What is interesting about MacKinnon is how it determined that expectation. Relying on the "common" understanding of the word "pollution" (although the policy talked in terms of "pollutants"), the court unanimously held it was reasonable to limit the exclusion to cases of environmental pollution; even though insecticides technically qualified as "pollutants" under the insurer's definition of the term, the negligent use of insecticides was covered because, reminiscent of Robert S., the exclusion was overbroad. The court heavily relied on legal commentators who had tracked the genesis, purpose, and history of the pollution exclusion. Thus, the court spent less time evaluating the contract's actual words than on "extrinsic evidence" to prove the exclusion was originally intended to apply only to traditional environmental pollution.
A literal interpretation of the policy language would have suggested that insecticide spraying was excluded. MacKinnon is interesting because, instead of relying on the four corners of the policy contract and language to determine reasonable expectation, it went beyond the policy language, relying on commentators to prove the drafters' original intent. This is a seeming contradiction of Bank of the West's rule that if the language is plain, it governs. Here, the "overbroad" language was unambiguous but, taken literally, the court found it led to an absurd result. Thus, although MacKinnon recited the reasonable expectation test, it determined the insured's expectation of coverage without reference to the policy's unambiguous exclusionary language, relying instead on evidence of drafter intent not expressed in the policy itself.
Many legal pundits have argued that the MacKinnon result was correct, and there may be some merit to that position. As the court observed, iodine is an "irritant," and one would not expect its misapplication in treatment to engage the pollution exclusion. The problem rests less with MacKinnon's result than with the methodology used to reach it: the use of drafting history to avoid a plain-language reading. This seemingly opens the door to extrinsic "evidence" beyond the four corners of the document, an approach that has seldom been used before. If the MacKinnon method gains a foothold, then the plain language rule may be rapidly losing ground.
The George court appears to be making slow and subtle inroads into the Bank of the West formulation and the methodology used to determine the existence or absence of coverage. It is becoming increasingly questionable whether insurers and insureds can still take the policy interpretation test to the bank.
This material is reproduced from California Civil Litigation Reporter, copyright 2003 by the Regents of the University of California. Reproduced with permission of Continuing Education of the Bar - California. (For information about CEB publications, telephone toll free 1-800-CEB-3444 or visit their Web Site, http://ceb.com/ .
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