United States: Policy Interpretation - May Be Changing

A.        THE LIBERTY SURPLUS INSURANCE CORP. DECISION

In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., Inc., 5 Cal.5th 216 (2018), the California Supreme Court held, in answering a question certified to it by the United States Ninth Circuit Court of Appeals, that the employer's ("Ledesma" or "L&M") negligent hiring, retention and supervision of an employee (Hecht) who molested a student at a school construction site constitutes an "accident" as that term is used in the definition of "occurrence" in a general liability policy. In so holding, the Supreme Court found that the term "accident" is more comprehensive than the term "negligence" and includes negligence. Further, the Supreme Court found that "tort principles" governed the question of causation in the context of interpreting what constitutes an "accident" under a general liability policy. While the court essentially acknowledged that Ledesma's conduct was intentional and the employee's molestation of the student was also intentional, it found that, because Ledesma did not "expect or intend" its employee to molest a student, an "accident" transpired as required by the definition of "occurrence" in the Liberty policy. The court held that:

"Even though the hiring, retention and supervision of Hecht may have been 'deliberate acts' by L&M, the molestation of Doe could be considered an additional, unexpected, independent and unforeseen happening . . . that produced the damage."

The Supreme Court relied, in part, on the argument that the insured's reasonable expectations of coverage afforded by its policy triggered a duty to defend under such policy, notwithstanding that the insured's conduct was deliberate and could be viewed as a remote cause of the plaintiff's injuries. In effect, the Supreme Court held that Ledesma's alleged negligence, although remote, was close enough to constitute an "accident" as used in the definition of "occurrence."

The Ledesma decision's reasoning suggests that the Supreme Court may be focusing on an insured's reasonable expectations of coverage, untethered, to a certain extent, from the language of an insurance policy. Such approach conflicts with the Supreme Court's prior decisions interpreting insurance policy language according to its plain meaning in the context of a particular claim. See, Bay Cities Paving & Grading v. Lawyers Mut. Ins. Co., 5 Cal.4th 854, 867 (1993).

B.        THE MONTROSE DECISION

The California Supreme Court has accepted for review the California Court of Appeal's decision in Montrose Chemical Corp. v. Superior Court, 14 Cal.App.5th 1306 (2017), which affirmed the trial court's denial of Montrose Chemical Corporation's ("Montrose") Motion for Summary Adjudication, arguing that it was entitled to "electively stack" excess policies in any triggered year as long as the lower-lying policies for the same policy year have been exhausted in connection with a continuous loss pollution claim. The Court of Appeal also held that a general rule requiring horizontal exhaustion, as advocated by the excess insurers, did not apply. Rather, an individual analysis of the policy language in each of the 115 excess policies at issue in the litigation was required in order to determine if such policies afford "vertical" or "horizontal" coverage. 

As such, the Court of Appeal applied well-established California law requiring a court to examine the specific language of an insurance policy in connection with determining if coverage is afforded under such policy for a particular claim. 

Finally, Montrose argued, in part, that "public policy" supported its suggested approach of electively stacking excess policies. In rejecting both Montrose's and the excess insurers' arguments, the Court of Appeal noted that insurance policies must be interpreted according to their terms, rather than applying general principles. Given the Court of Appeal's reasoning, the Supreme Court's decision to accept Montrose's Petition for Review may portend a different approach by the Court.

C.        TAKE AWAY

The Supreme Court's reasoning in the Ledesma decision, as well as its decision to accept review of the Court of Appeal's decision in the Montrose case, suggest that the court may further examine the rules governing policy interpretation with an emphasis on an insured's reasonable expectations of coverage, notwithstanding the meaning of language in an insurance policy. The current rules focus on the written provisions of an insurance contract. The clear and explicit meaning of these provisions interpreted in their ordinary and popular sense controls judicial determination. 

"The reliance on common understanding of policy language is bedrock." See, Bay City's Paving & Grading v. Lawyers' Mutual Ins. Co., 5 Cal.4th 854, 867 (1993). The Supreme Court's reasoning in the Ledesma decision, as well as its decision to accept review of the Montrose decision, suggest that "bedrock" can be moved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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