Exclusion Clause Was Not Clear and Plain Enough to Defeat the Reasonable Expecations of the Insured

An Insurance Company That Had Not Provided Notice to the Insured Could Not Rely Upon an Unusually Broad Interpretation of an Exclusion Clause

Essex Insurance Company v. City of Bakersfield (Aug. 27, 2007, F051091, Fifth District)
19 p. opinion

In this insurance coverage action the Court of Appeal reversed the summary judgment granted to Essex Insurance Company in a declaratory relief action. The Court of Appeal held that the very broad interpretations which Essex applied to the auto exclusions in its policy defeated the reasonable expectations of the insured. Because the exclusions were not plain and clear enough to defeat those reasonable expectations, Essex had a duty to defend its insured, the City of Bakersfield, in a third party action.

The City bought a special events CGL policy from Essex to cover a fundraising event for D.A.R.E. that the City was holding on private property. During the event an access point to the parking lot on the private property was designated as "exit only." Cars exiting at that exit made right turns into the eastbound lane of State Route 119. A City police officer who was monitoring that area of the parking lot saw a white van merging onto the right shoulder from the eastbound lane. He waved the van along. Guillermo Mena was driving a tractor-trailer that was behind the white van in the eastbound lane. Unable to determine what action the white van was taking, Mena applied his brakes. As a result, the tractor-trailer jackknifed and travelled into the westbound lane where it hit a car being driven west by Gloria Navarro.

Navarro sued the City alleging that the City had caused a dangerous condition during the D.A.R.E. event that contributed to the accident in which Navarro was seriously injured. The City tendered the defense and indemnification of the Navarro lawsuit to Essex. Essex rejected the tender and brought this action for declaratory relief.

The Essex CGL policy contained a modified auto exclusion which stated: "This insurance does not apply to bodily injury or property damage arising out of, caused by, or contributed to by the ownership, non-ownership, maintenance, use or entrustment to others of any auto." The word "non-ownership" had been substituted for the phrase "owned or operated by or rented to or loaned to any insured." Essex contended that the City's non-ownership of the vehicles involved in the accident caused the Navarro action to be excluded from coverage.

The Court of Appeal held that this interpretation of the auto exclusion created an unusual and unfair limitation of coverage that defeated the insured's reasonable expectations. In the absence of evidence that Essex brought its broad interpretations to the attention of the insured, the policy came within the rule established by the California Supreme Court that provisions limiting coverage that are not conspicuous, plain and clear cannot defeat an insured's reasonable expectations of coverage as provided by the insuring clause.

No reasonable insured would have expected that the policy would protect it from liability for negligently creating a dangerous condition of public property in all cases except where the dangerous condition led to an automobile accident involving vehicles that had no connection to the insured.

In addition, the Essex interpretation created an unusual distinction between the auto exclusion and the other insurance exclusions in the policy. The other exclusions excluded coverage for acts done by City employees in the scope of employment, by the City as employer, and certain events involving spectators and third parties that occurred on the premises of the event. When read in conjunction with these other exclusions, the auto exclusion was clearly meant to apply to cases involving the acts or omissions of the insured or its agents.

Essex's interpretation also did not comport with the common understanding of CGL policies. CGL policies have a very broad excluding clause but also contain numerous exclusions. The exclusions fall into two categories. The first are risks that the insurer does not want to cover under any circumstance (war, intentional injury and environmental pollution, for example). The second category of exclusions are for risks usually covered by other insurance policies. The auto exclusion excludes risks that would normally be covered by automobile liability insurance. However, there is no kind of automobile policy that the City could have bought to cover it for risks arising from an automobile accident where the City had no connection to the automobiles involved in the accident.

The Essex auto exclusions were not clear and plain enough to defeat the City's reasonable expectation that it had insurance for the negligent creation of a dangerous condition. The Navarro lawsuit therefore fell within the potential coverage of the policy and Essex had an obligation to provide the City with a defense.
Justice Hill wrote the opinion. Presiding Justice Vartabedian and Justice Wiseman concurred.

Comment: This opinion is the source of the quote of the week for the week of August 27th on the Civil Litigation Quote of the Week blog.