Mercury Casualty Company v. CHU

(Exclusion in automobile policy purporting to exclude coverage of lawsuit brought by non-relative resident against named insured is invalid and against public policy)

In Mercury Casualty Co. v. Chu, ____ Cal.App.4th ___ (September 24, 2014), the California Fourth District Court of Appeal reversed the trial court’s entry of summary judgment in favor of Mercury Casualty Company (“Mercury”) regarding application of an exclusion purporting to bar coverage of claims or lawsuits brought by an insured of the same household against another insured. The coverage dispute arose out of an underlying personal injury lawsuit filed by Tu Pham (“Pham”) against Hung Chu (“Chu”). Mercury had issued an automobile policy insuring Chu. Pham was injured as a result of an accident while he was riding in Chu’s automobile as a passenger. Pham was also Chu’s college roommate and lived in the same house as Chu.

Thereafter, Pham filed a lawsuit against Chu for injuries sustained as a result of the accident. Chu tendered the defense of Pham’s lawsuit to Mercury. Mercury agreed to defend Chu, but filed a declaratory relief action contending that exclusion (g) in its policy excluded coverage of Chu for the Pham lawsuit. This exclusion stated:

. . . to liability for bodily injury to an insured or liability for bodily injury to an insured whenever the ultimate benefits of that indemnification accrue directly or indirectly to an insured, including, in both instances, those persons who would have otherwise been included within this policy’s definition of an insured but who are excluded from coverage while using a motor vehicle.”

Mercury argued that because Pham was a resident of the same household as Chu, he qualified as an insured under the Mercury policy. Because Pham was an insured, exclusion (g) excluded coverage of Chu for Pham’s lawsuit. The trial court agreed and entered judgment in favor of Mercury.

The parties’ dispute related to the interpretation of California Insurance Code section 11580.1, subdivision (c)(5). The Court of Appeal referred to this Code section as follows:

Section 11580.1, subdivision (c) lists the only permissible exclusions from coverage allowed under California law for an automobile liability policy. Any exclusion not expressly authorized by section 11580.1 is therefore impermissible and invalid. It provides: “The insurance afforded by any policy of automobile insurance to which subdivision (a) applies, including the insurer’s obligation to defend, may, by appropriate policy provision, be made inapplicable to any or all of the following: . . . (5) Liability for bodily injury to an insured or liability for bodily injury to an insured whenever the ultimate benefits of that indemnification accrued directly or indirectly to an insured.”

The Court of Appeal characterized Exclusion 11580.1, subdivision (c)(5) (“(c)(5) Exclusion”) as follows:

Relevant to this case, section 11580.1, subdivision (c)(5) (hereafter the (c)(5) Exclusion), authorizes the carriers of automobile liability insurance to provide for exclusion of claims of liability coverage for bodily injury brought by “an insured.” Specifically, the exclusion permits exclusion of liability to either “an insured” or “an insured whenever the ultimate benefits of that indemnification accrue directly or indirectly to an insured.” (§ 11580.1, subd. (c)(5).)

We note the eight permitted exclusions discussed in section 11580.1, subdivision (c), refer to “the insured” and “an insured.” These two terms are further defined in section 11580.1, subdivision (c)(8), as follows: “‘The insured’ as used in paragraphs (1), (2), (3), and (4) shall mean only that insured under the policy against whom the particular claim is made or suit brought. ‘An insured’ as used in paragraphs (5) and (6) shall mean any insured under the policy including those persons who would have otherwise been included within the policy's definition of an insured but, by agreement, are subject to the limitations of paragraph (1) of subdivision (d) [to reduce premium insured excluded from policy a person “ ‘who would normally operate the subject vehicle but either because of age or driving record is considered a high risk’ ”].) Simply stated, the Legislature permits a person excluded from beneficial coverage to be deemed “an insured” for purposes of the exclusions listed in paragraphs (5) and (6) of section 11580.1, subdivision (c).

After describing the (c)(5) Exclusion, the Court of Appeal relied on the California Supreme Court’s decision in Farmers Ins. Exch. v. Cocking (1981) 29 Cal.3d 383, and held that the (c)(5) Exclusion is limited to claims brought by resident “relatives” residing in the same household (i.e. described as the “relative resident exclusion”). The purpose of the exclusion is to prevent fraud or collusion between relatives residing in the same household. The Court of Appeal rejected Mercury’s attempt to expand the “relative resident” exclusion to non-relatives. The Court of Appeal reasoned as follows:

D. Analysis of Nonrelative Resident Exclusion

Mercury cites the above statutory and case authority to support its position there is nothing wrong with expanding the “relative resident” exclusion to nonrelatives. It asserts the same policy and constitutional arguments would apply. We disagree.

In this case of first impression, Mercury seeks approval of a new “nonrelative resident” exclusion. We call it “new” because we found no case authority, law review article, or treatise examining the (c)(5) Exclusion's application to any class of persons other than “relative residents.” Mercury cites to no authority permitting an insurance company to achieve liability immunity from a significantly larger class of people based on their residency status alone and presumably without their knowledge or consent.

We begin by examining the scope of the new exclusion. Mercury's policy's exclusion section contains, clearly and plainly, the exact language contained in the (c)(5) Exclusion. As explained, the Legislature statutorily authorized Mercury to exclude claims of liability for bodily injury brought by “an insured.” Mercury's policy defines “an insured” in part I of the policy as including four categories of people as follows: (1) named insured and any relative; (2) persons listed in the policy; (3) permissive drivers; and (4) “residents other than” those described in categories (1) and (2) (defined above as relatives and all named insureds). In addition, the policy defines “resident” broadly as anyone who “inhabits the same dwelling as the named insured.” “Inhabits” and “dwelling” are not further defined.

“While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. … [T]he court must interpret the language in context, with regard to its intended function in the policy. [Citation.]” (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264–1265 [10 Cal. Rptr. 2d 538, 833 P.2d 545].)

In the many cases discussing the “resident relative” exception, the term “‘resident’” “varies according to the circumstances and facts of the case.” (Utley, supra, 19 Cal.App.4th at p. 821.) However, generally in those cases “an insured” in the context of applying the exclusion is limited to a small class of family members residing together with some degree of permanence. A cousin or aunt who temporarily visits a relative's home for the night is not “an insured” as defined by the “resident relative” exception cases.

We found no authority, and certainly nothing in the Supreme Court's Cocking opinion, authorizing expansion of the exception to nonrelatives residing together. To the contrary, the Cocking opinion addressed the limited issue of whether Wife could seek benefits from Husband's automobile policy. The court ruled the Legislature enacted the (c)(5) Exclusion to codify the state's public policy that permitted insurers to exclude “‘the named insured or members of his family.’” (Cocking, supra, 29 Cal.3d at p. 387, italics added.) The court rejected Wife's constitutional challenges after concluding the legislative classification related to the legitimate state purpose of preventing “‘suspect inter-family legal actions which may not be truly adversary.’” (Id. at p. 389.) The court determined excluding resident relatives served the public policy of insulating insurers “‘from collusive assertions of liability.’” (Ibid.)

Simply stated, the entire Cocking decision is based on the premise the (c)(5) Exclusion is being applied to a relative who resides with some permanence with the named insured. We conclude the court's reasoning does not apply to nonrelatives “inhabitthe same dwelling” as the named insured. Cohabitation can be temporary and involve complete strangers. There is no legal basis to assume insurers face the same risk of fraudulent lawsuits. College roommates often are complete strangers who do not have direct pecuniary interests or legal responsibilities with respect to each other.

As a result, the Court of Appeal held that the claim for personal injuries brought by Mr. Pham against the named insured, Mr. Chu, was not excluded by the insured exclusion in the Mercury policy. As such, the Court of Appeal concluded as follows:

Mercury's liability policy includes as “an insured” a nonrelative, who is not a permissive user of the car, and who has no insurable interest in the car or its owner. Mercury claims Pham is “an insured” yet he could not be held liable for loss or injury caused by the operation or use of the insured vehicle merely by his presence in Chu's residence. It appears Mercury named Pham “an insured” for the sole purpose of excluding him from coverage for bodily injury caused by use of the insured vehicle by the named insured.

To accept Mercury's new exclusion, we would have to place an unreasonable obligation on Pham's and Chu's other college roommates to determine how to avoid exposure to the risk of injury by Chu, who as to them, is uninsured. Certainly, Chu's roommates could decide not to ride in the same car as him but should they also be expected to avoid walking on the streets when Chu is out driving? We conclude no public policy consideration or legal authority justifies denying Pham's claim against the named insured of the policy. We find no significance in the mere status of cohabitation. Our state's financial responsibility laws were enacted to provide monetary protection to the public.5 If an insurer can define “an insured” as including a large population of the public (such as all persons inhabiting a large apartment complex on the basis of cohabitation) without regard to insurable interest, it would defeat the public policy behind requiring mandatory automobile insurance liability and undermine financial responsibility laws. The public will have no protection. Accordingly, we must conclude the nonrelative resident clause is an overbroad expansion of the (c)(5) Exclusion and contrary to public policy.