Coverage Analysis
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STANDARDS FOR POLICY INTERPRETATION

The rules for interpreting contracts, including insurance policies, are set forth in the California Civil Code.  As detailed in AIU Ins. Co. v. FMC Corp., 51 Cal.3d 807 (1990), contract interpretation is governed for the most part by the mutual intentions of the parties at the time the contract is formed (§1636, 1647).  This intent is to be inferred, if possible, from the written terms of the contract.  (§1639).  These terms are to be given their ordinary and popular meaning unless the parties both intend them to have a technical or special meaning. (§1638 and §1644).  If the terms are ambiguous, however, they are to be given the meaning that the insurer understood the insured had of them at the time the policy was issued. (§1636).  If ambiguity remains after that, the terms will be interpreted against the party who drafted the contract. (§1654).

Further, Civil Code Section 1644 provides that "the words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the later must be followed.  

The statutory requirement that limitations on coverage be expressed in “conspicuous, plain and clear” language have been held to only apply to exclusions and not to matters within the insuring agreement.  Certain Underwriters of Lloyd’s, London v. Superior Court, 21 Cal.4th 545 (Cal. 2001).

These standards were refined in AIU and the California Supreme Court's subsequent rulings in Bank of the West and Bay Cities.  Essentially, the court has directed that a three part test be used.  First, the mutual intent of the parties should be derived from the written terms of their contract, if possible.  If not, a court should next look the objectively reasonable expectations of the insured at the time of contracting, based on what the insurer reasonably believed that the insured understood that it was purchasing.  Only, if any remaining ambiguity cannot be answered through these steps should it be resolved in favor of the insured (except where the insured was itself a participant in the drafting of the subject language).  See  Cooper Co. v. Transcontinental Ins. Co., 31 Cal. App.4th 1094, 37 Cal. Rptr.2d 508 (1995).

California courts look to the insured's "objectively reasonable expectations" of coverage. AIU, 51 Cal.3d 807, 822 (1990).  However, the rule of "reasonable expectations" will only be invoked where the policy language in question is "unclear." State Farm Mutual Auto Ins. Co. v. Khoe, 884 F.2d 401 (9th Cir. 1989). Even assuming some ambiguity in the policy language, whether "the insured's expectation of coverage is reasonable is a matter of law."  Hallmark Ins. Co. v. Superior Court, 201 Cal. App.3d 1014, 1019 (1988).   In general, this inquiry is focused on the understanding of the insured at the time the insurance contracts were signed.  

The California Supreme Court ruled in Bank of the West v. Superior Court, 2 Cal. 4th at 1265, that "in determining whether coverage is consistent with the objectively reasonable expectations of an insured, the court must interpret the language in context, with regard to its intended function in the policy.  This is because language in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract."  

A policy term is ambiguous if it is susceptible of two or more interpretations.  North Bay Schools Ins. Auth. v. Industrial Indem. Co., 6 Cal. App. 4th 1741, 1745 (1990).  However, coverage terms may not be analyzed in a vacuum.  Blumberg v. Guarantee Ins. Co., 192 Cal. App.3d 1286, 1294 (1987).  Rather, the policy must be construed in its entirety, with each clause interpreted in relation to the others contained therein.  Bank of the West v. Superior Court, 2 Cal.4th 1254, 1265 (1992) and Buss v. Transamerica Ins. Co., 16 Cal.4th 35, 65 Cal.Rptr.2d 366, 939 P.2d 766 (1997).

Wording in an insurance policy must be part of the working vocabulary of the average person and must be phrased in a logical manner.  Blasiar, Inc. v. Fireman’s Fund Insurance Company, 1999 Cal.  App.  LEXIS 1047 (2d Dist. August 25, 1999).  Wordings will not be deemed ambiguous merely due to the absence of a policy definition, nor is the absence of case law construing such terms a reason for finding ambiguity.  Bay City Paving & Grading, Inc. v. Lawyers Mutual Insurance Company, 5 Cal. 4th 854, 866-67 (1993).  Further, language in an insurance policy must be construed in the context of the instrument as a whole “with regard to its intended function in the policy.”  Furzeig v. Insurance Company of the West, 59 Cal. App. 4th 1276, 1283 (1997).  

Extrinsic evidence of drafting history or concerning the unilateral intent of a party will ordinarily not be considered.  However, in Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 913 P.2d 878 (1995), even though the "trigger" provisions in the CGL policy were unambiguous, the court found that it was appropriate to examine the so-called "drafting history" of these terms.  However, in an August 31 order modifying its original order, the court added a clarifying sentence, stating that evidence of drafting history had been made relevant because of Admiral's argument that "from a public policy standpoint, the insurance industry will be harmed by the adoption of a continuous injury trigger that the industry never anticipated would be applied to these policies."  Accordingly, it is less clear that similar evidence would be permitted in cases, such as those involving the pollution exclusion, where insurers have not sought to make affirmative use of drafting history evidence.   Indeed, the Court of Appeal ruled that a trial court had not erred in granting summary judgment for insurers without allowing discovery on the history of "personal injury" coverage and the "absolute" pollution exclusion in Interstate Truck Insurance Exchange v. Interstate Brands Corp., No. B087522 (Cal. App. October 2, 1996).

On the other hand, some California courts have ruled that the unexpressed understanding or intention of one party to an insurance contract is insufficient to establish ambiguity or permit the introduction of extrinsic evidence of contracting intent.  City of Mill Valley v. Transamerica Insurance Company, 98 Cal. App.3d 595 (1979) and Golden Eagle Refinery Company v. Associated International Insurance Company, 2001 Cal. App. LEXIS 3 (2d Dist. January 3, 2001).

The various divisions of the Court of Appeal have come to differing conclusions with respect to whether evidence of drafting history is relevant.  Such evidence was deemed relevant by the Fourth District in a case involving the meaning of "business risk" exclusions for property damage. Maryland Cas. Co. v. Reeder, 221 Cal. App.3d 961, 270 Cal. Rptr. 961 (4th Dist. 1990), rev. denied, (Cal. 1991).  The First District has also allowed such evidence as a means of determining whether the insured had an objectively reasonable coverage expectation because of ambiguous policy language.  Prudential-LMI Ins. Co. v. Ins. Co. of the West, 22 Cal. App. 4th 1508, 1512, 27 Cal. Rptr.2d 481 (1994).  

By contrast, the Third District ruled in American Star Ins. Co. v. Ins. Co. of the West, 232 Cal. App.3d 1320, 1329, 284 Cal. Rptr. 45 (1991) and ACL Technologies, Inc. v. Northbrook Property & Cas. Ins. Co., 22 Cal. Rptr.2d 206 (Cal. App. 1993)(pollution exclusion) that "drafting history" is not relevant to the interpretation of unambiguous policy language, particularly in the absence of any evidence that the insured's statements concerning a policy term were ever communicated to the insured.  See also  Flintkote Co. v. American Mutual Liability Ins. Co., San Francisco No. 808-594, Tentative Decision (Cal. Super. October 14, 1992)("drafting history" evidence on the trigger of coverage question was inconsistent and inconclusive.  Likewise, in Lick Mill Creek Apartments v. General Star Ind. Co., A066564 (Cal. App. November 27, 1995), the First District ruled in unpublished decision that a contracting party's subjective intent is not relevant where it is not known or shared by the other contacting party.

Exclusions can only decrease coverage, they cannot increase it.  Stanford Ranch, Inc. v. Maryland Casualty Co., 89 F.3d 618, 626 (9th Cir. 1996).  Accordingly, courts cannot find coverage based on coverage that is allegedly reinstated by a policy exclusion that allegedly is in conflict with the grant of insurance in the insuring agreement.

In considering the meaning of the policy terms, a court may consider the fact that the insured was a sophisticated buyer of insurance represented by a professional broker.  Feurzeig v. Ins. Co. of the West, 1997 Cal. App. LEXIS 1027 (4th Dist. November 12, 1997) and Advanced Micro Devices, Inc. v. Great American Surplus Lines Ins. Co., 199 Cal. App. 3rd. 791, 801 (1988). 

Some California courts have ruled that doctrines such as "reasonable expectations" and contra proferentum do not apply to "sophisticated insureds" where the allegedly ambiguous policy language was drafted jointly by the insured and insurer.  See AIU, Garcia v. Truck Ins. Exchange, 36 Cal.3d 426 (1984) and Firemans Fund Ins. Co. v. Fibreboard Corp., 182 Cal. App.3d 462 (1st Dist. 1986) and F.S. Smithers & Co., Inc. v. Federal Ins. Co., 631 F.2d 1364 (9th Cir. 1980).   Thus, in Atlantic Mutual Ins. Co. v. Travelers Ins. Co., 147 Cal. App.3d 1054, 195 Cal. Rptr. 476 (4th Dist. 1983), the Court of Appeal ruled that these doctrines had no application to a coverage dispute between parties of equal bargaining strength and sophistication. Accord, Advanced Micro Devices v. Great American Surplus Lines, 199 Cal. App.3d 791 (1988).  But see, Keating v. National Union, 745 F.Supp. 1431 (C.D. Cal. 1990)(sophistication of insured not a factor in assessing reasonable expectations of coverage).

California courts have sometimes relied on dictionary definitions as evidence of the ordinary and popular meaning of words.  Golden Security Thrift and Loan Association v. First American Title Ins. Co., 1997 Cal. App. LEXIS 165 (4th Dist. January 30, 1997) ("dimensions").  However, the Supreme Court recognized in Bank of the West that "although general dictionary definitions of the relevant policy terms would reflect many popular meanings, any one of which might be reasonable in the abstract, we recognize that discovery of an ambiguity is not a matter of abstract philology."  See also Lebas Fashion Imports of U.S.A. v. ITT Hartford, 59 Cal. Rptr.2d 36, 43, 50 Cal. App.4th 548 (2d Dist. 1996).

The sole purpose of an insurance binder is to serve as evidence “that the policy has not yet been issued since the binder is effective until either the insurance application is rejected or the policy is issued.  Ahern v. Dillenback, 1 Cal. App. 4th 36, 1 Cal. Rptr. 2d 339, 346 (1991).

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