Lead Opinion
Opinion
We granted review to decide the recurring issue whether a commercial general liability insurer is required to defend a third party action that seeks incidental emotional distress damages caused by the insured’s noncovered economic or business torts. The Court of Appeal below concluded that allegations of incidental emotional distress damages flowing from noncovered causes of action fall outside the scope of a commercial (formerly called comprehensive) general liability (CGL) policy and present no potential for coverage under the policy. Accordingly, the Court of Appeal reasoned, because there is no potential for coverage, there is no duty to defend on the part of the insurer. (Gray v. Zurich Insurance Co. (1966)
Facts
In 1985, defendant Truck Insurance Exchange, Inc. (hereafter T.I.E.) issued a CGL policy to plaintiff Marmac, Inc., a California corporation that
In pertinent part, the T.I.E. policy provided liability coverage for: “all damages which the insured becomes legally obligated to pay because of. . . bodily injury to any person, and . . . damage to property ... to which this insurance applies, caused by an occurrence.” The policy did not provide personal injury coverage to Marmac directors and officers and specifically excluded coverage for any insured for bodily injury to a named insured. The policy defined an “occurrence” “as an event, or series of events, including injurious exposure to conditions, proximately caused by an act or omission of the insured regardless of the number of persons, vehicles or objects affected by the act or omission which results, during the policy period, in bodily injury or property damage, neither expected nor intended from the standpoint of the insured.” Defendant Farmers Insurance Exchange (Farmers), as T.I.E.’s adjuster, was responsible for handling claims filed by T.I.E. insureds.
Prior to August 29, 1986, plaintiff Waller, Marmac’s president, owned 60 percent of Marmac stock. Amey, Marmac’s executive vice-president, owned 40 percent. On August 29, 1986, Waller sold his stock in equal proportions to employees Hendrix, Akers, Petersen, and Hepple. Thereafter, Waller resigned from Marmac’s board, and Hendrix and Hepple were elected to the board, with Amey remaining as the third member. Akers subsequently became president of the company, and Hendrix, Hepple and Petersen became vice-presidents. Amey was thereafter demoted.
Amey sued Marmac, Waller, and the four Marmac officers under 11 causes of action: involuntary dissolution (Corp. Code, § 1800, subd. (b)(4) & (5)); breach of fiduciary duty; breach of statutory duty of good faith (id., § 309); interference with prospective economic advantage; breach of contract; breach of the implied covenant of good faith and fair dealing; breach of duty of good faith and fair dealing; inducing breach of contract; conspiracy; intentional infliction of emotional distress; and injunctive relief. The first amended complaint included allegations that Marmac’s board of directors was “guilty of or have knowingly countenanced acts of persistent and pervasive fraud, mismanagement or abuse of authority and persistent unfairness toward Amey,” and that they excluded “Amey from any voice in the management [of Marmac]” to deprive him of a controlling block of stock in
Amey also accused Waller of disregarding and breaching his fiduciary duties to Amey, failing “to exercise good faith and due care so as to avoid unfairness to [Amey] by entering into a transaction to dispose of his dominant or control block of stock in [Marmac] without the slightest regard to the wishes and interests, and without prior knowledge of [Amey], and for the purpose of gaining an unfair advantage in the sale or transfer of said controlling block of shares.”
Amey’s 10th cause of action alleged intentional infliction of emotional distress against Waller and the Marmac officers, and claimed that because of their conduct, Amey “suffered humiliation, mental anguish, and emotional and physical distress.” Amey alleged that as fiduciaries, Waller and the Marmac officers’ conduct leading up to the involuntary dissolution and wrongful termination as alleged in the complaint “was outrageous, went beyond all reasonable bounds of decency, was intentional and malicious and was done for the purpose of causing [Amey] to suffer humiliation, mental anguish, and emotional and physical distress.” In making these allegations, Amey did not include Marmac as a named defendant, but nonetheless incorporated all allegations of corporate misconduct and financial detriment into the cause of action.
One week after the Amey suit was filed, Robert Kull, Marmac’s corporate attorney, wrote T.I.E. at its home office requesting the insurer defend the Amey lawsuit on behalf of all defendants. About three weeks latter, the letter was forwarded to Farmers’ regional liability claims manager in Santa Ana. The claims manager sought an in-house coverage opinion, but did not act on the defense question. That issue was forwarded to Farmers’ Anaheim branch claims office. Richard Neisser, manager of the Anaheim office, tentatively concluded that the complaint alleged a noncovered business dispute. He discussed the matter with William Vaughter, a claims representative, and instructed Vaughter to investigate the loss and to verify whether the Amey complaint had been served. Vaughter told Hendrix around December 10 or 11, 1986, that he was going to process the claim for payment. According to Hendrix, Vaughter then asked whether he was pleased with his counsel because Farmers could provide counsel if he was not.
On December 29, 1986, the insureds forwarded to Vaughter the total billing (in the amount of $54,000) for attorney fees incurred in defending
The regional claims manager (Eastman) concurred in Neisser’s decision that the CGL policy did not provide coverage under the allegations of the Amey complaint. Eastman based his decision on the following factors: (1) Amey’s complaint did not state an occurrence within the policy insuring clause because Amey was not claiming bodily injury or property damage, and any economic injuries he suffered were expected or intended from the standpoint of the insureds; (2) the policy endorsement listed Amey as a named insured and the policy expressly excluded coverage for liability to named insureds; and (3) Amey was a Marmac employee, and the policy excluded coverage for bodily injury suffered by Marmac employees arising out of and in the course of employment. Eastman testified that the amount of attorney fees already incurred did not influence his decision to recommend a denial of coverage under the policy.
In January 1987, Eastman directed Neisser: “Please deny the insureds’ request with an appropriate response outlining specifically that since no coverage is available under the policy contract, nothing can be considered as far as any payment is concerned.” Neisser sent the insureds the following denial letter:
“We have received your claim for attorney fees in the Lester H. Amey v. Marmac [case]. Accordingly, we have reviewed your policy in its entirety, spoken to your agent, obtained the opinion of our house counsel and submitted the entire packet of information to our Regional Office for a decision regarding whether this loss is covered under your policy.
“The claim against Marmac is essentially a shareholder dispute regarding intentional acts committed by Marmac and their principles [sic]. Intentional Acts are not covered under your Sentinel business policy or any endorsements taken out by Marmac. Accordingly we are unable to make payment for legal expenses incurred by Marmac in this matter.”
Marmac’s counsel asked for reconsideration of the denial, asserting that Amey’s amended complaint created a potential for coverage under the CGL
Between May and August of 1987, Waller, Marmac, and the four individual defendants filed separate lawsuits against T.I.E. and Farmers, alleging causes of action for breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, fraud, deceit, and negligent misrepresentation. All plaintiffs sought both compensatory and punitive damages. Waller amended his pleading to substitute Farmers, Farmers Group, Inc., and Truck Underwriters Association for several Does. (Waller later dismissed the latter two entities from his complaint.) Marmac and the other plaintiffs amended their pleadings to substitute Farmers as a party. Two years later the three actions were consolidated and the parties filed second amended complaints, the subject of this proceeding. Only Waller’s second amended complaint alleged a cause of action for statutory bad faith pursuant to Insurance Code section 790.03. Marmac, Hendrix, Akers, Petersen, and Hepple amended their complaints to include a section 790.03 cause of action following the close of evidence at trial.
After the trial court denied a joint motion for judgment on the pleadings filed by T.I.E. and Farmers, the parties tried the legal issues to the court. (Code Civ. Proc., § 592.) The court ruled that (1) Amey’s first amended complaint “alleges facts potentially within bodily injury coverage” of the T.I.E. policy; (2) as a matter of law, “the occurrence clause in [the policy] gives rise to a duty to defend in this case”; (3) T.I.E.’s letter to Marmac denying coverage “waived policy based defenses not specified therein”; and (4) Insurance Code section 533, disallowing coverage for the insured’s “willful” acts, did not excuse T.I.E. from its duty to defend under the policy. The trial court concluded: “[T]he logical conclusions of all the findings made so far, [is that] as a matter of law you had a duty to defend.”
Following plaintiffs’ opening statements in the jury trial, the trial court granted motions for nonsuit filed by T.I.E. and Farmers on the following causes of action: breach of fiduciary duty, fraud, deceit and negligent misrepresentation, as well as claims by Marmac and Hendrix, Petersen, Akers, and Hepple regarding allegations that T.I.E.’s failure to defend the Amey lawsuit prejudiced their defense.
The trial court granted plaintiffs’ motions for partial directed verdict that T.I.E. breached the implied covenant of good faith and fair dealing, and that Farmers was jointly and severally liable with T.I.E. for the breach.
After concluding that both T.I.E. and Farmers violated Insurance Code section 790.03, the jury returned verdicts in favor of plaintiffs in the
After originally being deadlocked on the punitive damages issue, the jury returned a nine-to-three verdict in favor of such damages. It awarded Waller $27 million in punitive damages against Farmers, and $3 million in punitive damages against T.I.E. Marmac received punitive damages totaling $26 million, and Hendrix, Akers, Petersen, and Hepple received a total of $4 million in punitive damages.
On motions for new trial filed by T.I.E. and Farmers, the court ordered the judgment corrected to eliminate Farmers’ liability for policy benefits. The court also ruled that the punitive damages awarded to Hendrix, Akers, Petersen, and Hepple were excessive.
Both T.I.E. and Farmers appealed and the Court of Appeal reversed the entire judgment after concluding that T.LE.’s CGL policy did not provide coverage under the allegations of the Amey complaint. The Court of Appeal concluded that because Amey’s alleged emotional and physical distress flowed from noncovered economic loss, there was no potential for coverage and hence no duty to defend the plaintiffs against the Amey lawsuit. The Court of Appeal summarized its holding as follows: “Clearly, the Amey lawsuit sets forth nothing more than a business dispute; the torts alleged in the suit are all business and contract transgressions. Simply put, the gravamen of the Amey lawsuit is economic loss. In our view, the damages claim for emotional and physical distress is clearly derivative of and caused by the economic loss suffered by Amey.”
We conclude the Court of Appeal correctly analyzed the duty to defend and coverage issues under authority from our state and federal courts. Moreover, the finding of no duty to defend in this context is consistent with the reasonable expectations of the parties when they enter into a contract for commercial general liability insurance, for it is widely understood by both insureds and insurers that such policies are not intended to cover economic losses. As we explain, the damages alleged in Amey’s complaint flowed from intangible property losses that could not be considered covered occurrences under the CGL policy. Likewise, the derivative emotional distress
Discussion
A. The Commercial General Liability Policy
In pertinent part, a CGL policy, often referred to as a business general liability policy, provides liability insurance for businesses. The policy is written in two essential parts: the insuring agreement, which states the risk or risks covered by the policy, and the exclusion clauses, which remove coverage for risks that would otherwise fall within the insuring clause. (Collin v. American Empire Ins. Co. (1994)
“Second, although exclusions are construed narrowly and must be proven by the insurer, the burden is on the insured to bring the claim within the basic scope of coverage, and (unlike exclusions) courts will not indulge in a forced construction of the policy’s insuring clause to bring a claim within the policy’s coverage.” (Collin v. American Empire Ins. Co., supra,
The CGL policy restricts coverage to damages “caused by an occurrence,” which, in standard pre-1986 policies, was defined as an “accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” Although more recent policies (including T.I.E.’s policy) have replaced the term “accident” with “event” (to include gradual events within the concept of accident), the phrase “neither expected nor intended” focuses coverage on unexpected or accidental injuries that are
Standard CGL policies define bodily injury to mean: “bodily injury, sickness or disease [including death at any time resulting therefrom] sustained by any person.” (3 Keller & Golub, Cal. Insurance Law & Practice (1995) ch. 49, General Liability Policies, §49.14[1], pp. 49-27 to 49-28.)
The property loss section of the standard policy provides coverage for “physical injury or destruction of tangible property which occurs during the policy term." The focus of coverage for property damage is therefore the property itself, and does not include intangible economic losses, violation of antitrust laws or nonperformance of contractual obligations. (See, e.g., Gulf Ins. Co. v. L.A. Effects Group, Inc. (9th Cir. 1987)
Finally, by statute, and as a matter of public policy, the insurer may not provide coverage for willful injuries by the insured against a third party. (Ins. Code, § 533.)
The Interpretation of Insurance Contracts
When determining whether a particular policy provides a potential for coverage and a duty to defend, we are guided by the principle that interpretation of an insurance policy is a question of law. (AIU Ins. Co v. Superior Court (1990)
The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the “mutual intention” of the parties. “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (Civ. Code, § 1636.) Such intent is to be inferred, if possible, solely from the written provisions of the contract. (Id., § 1639.) The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’ (id., § 1644), controls judicial interpretation. (Id., § 1638.)” (AIU, supra, 51 Cal.3d at pp. 821-822; Bank of the West v. Superior Court (1992)
These well-established precepts of insurance coverage guide us in our determination of whether a particular policy requires a liability insurer to defend a lawsuit filed by a third party against the insured. It has long been a fundamental rule of law that an insurer has a duty to defend an insured if it becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement. (Gray, supra,
Conversely, where the extrinsic facts eliminate the potential for coverage, the insurer may decline to defend even when the bare allegations in the complaint suggest potential liability. (Saylin v. California Ins. Guarantee Assn. (1986)
B. T.I.E.’s Duty to Defend
The T.I.E. CGL policy insuring language was standard. The company agreed to “pay all damages which the insured becomes legally obligated to pay because of. . . bodily injury to any person, and . . . damage to property ... to which this insurance applies, caused by an occurrence.” Bodily injury was defined as “sickness or disease” and property damage
The policy defined “occurrence” to mean “an event, or series of events, including injurious exposure to conditions, proximately caused by an act or omission of the insured regardless of the number of persons, vehicles or objects affected by the act or omission which results, during the policy period, in bodily injury or property damage, neither expected nor intended from the standpoint of the insured.” Thus, to demonstrate a potential for coverage under T.I.E.’s policy, an insured must show the claim he must defend is an alleged act or omission that caused bodily injury or tangible property damage (as defined by the policy) to the third party, and that the alleged injury was neither expected nor intended by the insured.
The first issue we address is whether, under the insuring language and definitions of the liability policy, T.I.E. owed a duty to defend plaintiffs against Amey’s lawsuit based on the fact that T.I.E.’s CGL policy provided coverage for “property damage” and “bodily injury” caused by an “occurrence.”
In reversing the trial court judgment, the Court of Appeal focused on the fact that Amey’s complaint alleged emotional and physical distress flowing from an uncovered economic loss. The appellate court found no duty to defend the underlying lawsuit because the “gravamen” of the complaint was economic loss. It found the damages for emotional and physical distress were derivative of and inseparable from Amey’s allegations of intentional and business torts, allegations that could not, by themselves, give rise to coverage under a CGL policy.
The Court of Appeal relied principally on three cases (including two cases decided after the trial in the present matter) to conclude that T.I.E. had no duty to defend the Amey action because plaintiffs’ alleged misconduct (as asserted in the Amey complaint) was not potentially covered by the T.I.E. policy. (Keating, supra, 995 F.2d at pp. 156-157; McLaughlin, supra, 23 Cal.App.4th at pp. 1150-1151; Chatton, supra,
In Keating, supra, the United States Court of Appeals for the Ninth Circuit addressed the issue whether, under California law, an insurer had a duty to
The Keating court relied on Allstate Ins. Co. v. Interbank Financial Services (1989)
As in Allstate, supra, 215 Cal.App.3d at pages 830-831, the Keating court recognized that economic or business loss “of the sort alleged by the investors” is not a covered loss within the meaning of a standard CGL policy. Nor, in the Keating court’s view, is emotional and physical distress induced by (or derivative of) the economic loss a covered event. As the court observed, “It would expand coverage of these policies far beyond any reasonable expectation of the parties to sweep within their potential coverage any alleged emotional or physical distress that might result from economic loss that is itself clearly outside the scope of the policy.” (Keating, supra, 995 F.2d at p.156.) For this latter statement, the Keating court relied on Chatton, supra,
In Chatton, several investors sued the directors and officers of Technical Equities, an investment services company, for fraud, negligent misrepresen
The Court of Appeal reversed, holding that any emotional distress suffered by the investors due to their economic losses was not covered by the liability policy even though those losses were caused by the negligent misrepresentations of Technical Equities officers and directors. (See Warner v. Fire Ins. Exchange (1991)
The present Court of Appeal also relied on McLaughlin, supra,
We agree with the Court of Appeal below that Keating, Chatton, and McLaughlin properly determined that CGL policies do not provide coverage for economic losses that cause emotional distress. As we have observed, the CGL policy provides coverage for “occurrences” that cause bodily injury or tangible property losses. (Giddings, supra,
First, plaintiffs contend that T.I.E. and Farmers should not be allowed to rely on either Keating or McLaughlin, or their theory of no coverage for economic losses, because those cases were not decided until after the trial in the present matter was complete. Moreover, plaintiffs contend the “economic loss” issue cannot be considered because it was not raised in the trial court or in the regular briefing in the Court of Appeal.
Both arguments fail. As T.I.E. and Farmers observe, Courts of Appeal routinely consider newly published case law that was not available until after entry of judgment in the trial court. (See, e.g., Hattersley v. American
Moreover, after the Keating and McLaughlin cases were decided, T.I.E. (and Farmers) sought, and obtained permission, to file supplemental briefs. As the Court of Appeal observed, supplemental briefing is proper when a court wishes to consider a point of law following the regular briefing of a case on appeal. (See Meier v. Ross General Hospital (1968)
Second, as T.I.E., Farmers, and the Court of Appeal observe, the duty to defend issue involves a question of law based on undisputed facts. Under settled law, the Court of Appeal had discretion to address the issue even though it had not been raised in the trial court. (Canaan v. Abelnour (1985)
In a related context, plaintiffs assert the Court of Appeal should not have applied Keating or McLaughlin “retroactively” because both cases represent new law that should not be used to justify T.I.E.’s denial of a defense to the Amey action. Plaintiffs also claim that any uncertainty on legal questions of policy interpretation compels a defense of a third party lawsuit until the issue is resolved by controlling authority.
These claims ignore the general rule that judicial decisions are to be applied retroactively. (Newman v. Emerson Radio Corp. (1989)
Notwithstanding the general rule on retroactive application of case law, plaintiffs assert that neither Keating nor McLaughlin should apply to their
Similar arguments were rejected by the high court in Harper, supra,
Plaintiffs’ related claim, that the lack of authority on the duty to defend issue required a defense by T.I.E. of the Amey lawsuit because “uncertainty of policy interpretation compels a duty to defend in this case,” is equally unmeritorious. Plaintiffs misinterpret CNA Casualty of California v. Seaboard Surety Co. (1986)
As plaintiffs themselves observe, the determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. (Gray, supra,
Here, the terms of the policy provided coverage for an “occurrence,” meaning an event proximately caused by the insured’s act or omission that causes either bodily injury or tangible property damage neither expected nor intended from the standpoint of the insured. The event in this case that led to Amey’s complaint was the purposeful conduct of Waller and Marmac in allegedly mismanaging Marmac property, manipulating the value of Marmac stock, disregarding Amey’s rights as a minority shareholder, violating the corporate bylaws, interfering with Amey’s prospective economic advantage and inducing Waller to breach his stock-sale contract with Amey. This .conduct, according to plaintiffs eventually resulted in financial detriment to Amey and was the reason he suffered “humiliation, mental anguish, and emotional and physical distress.” Thus, the alleged policy “occurrence” under which T.I.E. evaluated coverage was based entirely on economic acts or events that resulted in economic injury and mental and physical damages to Amey. At no point did Amey allege an “occurrence” that could have triggered liability and thus a duty to defend, i.e., an event based on a noneconomic act causing either emotional distress or bodily injury.
Plaintiffs claim that the “plain meaning of the words [in the insuring clause] would lead the insured to reasonably expect the insurer to defend him against suits seeking damages for bodily injuries caused by an occurrence as defined.” This argument is misleading, for it ignores the fact that the occurrence or act leading to coverage must be an injury to tangible property, not to one’s economic interest. It is well established that CGL
Plaintiffs next criticize Chatton (and, indirectly, Keating and McLaughlin) for creating an “economic loss” exclusion by allegedly confusing the definitions of “bodily injury” and “property damage” as they appeared in the CGL policy. This “economic loss exclusion,” plaintiffs claim, “is an unwarranted expansion and attenuation of the holding in Giddings v. Industrial Indemnity Co., supra,
Plaintiffs claim that Chatton created an “economic loss” exclusion by erroneously eliminating the separate and independent nature of “bodily injury” coverage and “property damage" coverage in a CGL policy. They argue that Chatton would require covered property damage as a prerequisite to bodily injury and thereby eviscerate the separate and independent coverage for bodily injury resulting from an occurrence, and criticize Chatton’s reliance on cases defining “tangible property loss.” (See, e.g., Allstate, supra,
We agree with the Court of Appeal that plaintiffs’ criticism of the Chatton analysis is unwarranted. As the Court of Appeal observed, when the third party complaint alleges emotional and/or physical distress flowing from economic losses—as was the case in Chatton, Keating, and McLaughlin as well as in the present lawsuit—the occurrence or event that causes damages is an economic loss. There is no separate “bodily injury” occurrence within the terms of the policy. Thus, the injured party’s claim that he suffered incidental emotional distress flows directly from the economic occurrence and, hence, is not covered by the CGL policy.
As the Court of Appeal also noted, the result reached by the courts in Chatton, Keating, and McLaughlin is consistent with the reasonable expectations of the parties when they enter into an insurance contract for CGL
Plaintiffs also attempt to distinguish this case from Chatton, Keating, and McLaughlin on the ground that the definition of “occurrence” in the T.I.E. policy is different from the standard definition found in the policies governing the above cases. In the T.I.E. policy, the word “accident” is absent from the definition of “occurrence,” and there is no modifying language for “event or series of events” in the occurrence clause. Plaintiffs claim this indicates that the volitional nature of the occurrence or event leading to coverage is irrelevant, and the T.I.E. policy therefore potentially covers intentional or purposeful acts. Plaintiffs rely on United Pacific Ins. Co. v. McGuire Co. (1991)
The issue in United Pacific, supra,
Plaintiffs assert that United Pacific supports their argument for a duty to defend in cases involving intentional economic torts that lead to emotional distress. The argument is misplaced. First, in contrast to the present case, the United Pacific court did not question whether coverage for “bodily injury” includes incidental emotional distress damages that may flow from a non-covered loss. In addition, as the Court of Appeal below observed, the issue we address does not focus on whether plaintiffs’ actions toward Amey were intentional; thus, this difference in the policy language is irrelevant.
Finally, plaintiffs assert that the Court of Appeal disregarded the rule set forth by this court in Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th
Plaintiffs are correct that the complaint for sexual misconduct in Horace Mann, supra, 4 Cal.4th at pages 1079-1080, alleged potentially covered negligent acts. By contrast, the Amey complaint alleged no potentially covered acts because all allegations were based on the occurrence of business torts, corporate mismanagement and other equally noncovered acts. Moreover, rather than predominate, the noncovered acts in this case comprised the entire complaint. Thus, the facts on which Amey based his theory of intentional infliction of emotional distress were identical business and contract transgressions on which he based the remainder of his complaint. Unlike the complaint in Horace Mann, supra,
Plaintiffs also argue that in addition to the alleged emotional and physical distress, the Amey complaint asserted loss in reputation and humiliation that did not arise from the occurrence of economic loss and should give rise to a duty to defend under Horace Mann, supra,
As T.I.E., Farmers, and the Court of Appeal observe, however, any lost reputation and humiliation Amey may have suffered was, like the emotional and physical distress alleged in the Amey complaint, directly related to the uncovered business torts and economic loss. That plaintiffs’ alleged business torts may have caused Amey to feel betrayed, angry or distressed, does not transform those feelings into a separate occurrence under the bodily injury clause of the CGL policy.
C. Waiver and Estoppel
The trial court ruled that, as a matter of law, T.I.E.’s denial letter of January 16, 1987, “waived policy based defenses not specified therein.” On appeal, T.I.E. challenged the trial court’s ruling, but the Court of Appeal declined to reach the issue after concluding there was no potential of coverage under the policy. Plaintiffs now assert that even if Chatton, Keating, and McLaughlin correctly preclude coverage for emotional distress damages arising from an economic occurrence, T.I.E. nonetheless should have been required to provide a defense to the Amey action on the ground that a liability insurer that refuses to defend a suit on a specified ground impliedly waives all other nonspecified grounds it knew or would have discovered by a reasonable investigation.
In their opening briefs, plaintiffs assert that in addition to waiver of defenses based on T.I.E.’s denial letter, T.I.E.’s “conduct over the past seven years, particularly the failure to raise the ‘Keating’ issue in its denial letter and subsequent failure to raise the issue during litigation, evidences an objective intent to waive its right to rely on the issue.” We address the waiver issue notwithstanding the Court of Appeal’s refusal to do so, and despite the fact that it was not actually pleaded by plaintiffs at the trial court level, because it was a basis for the trial court’s findings and is an important
1. Waiver
As noted above, T.I.E. denied a defense to the Amey action because it believed the CGL policy provided no potential for coverage for what its claims managers believed was essentially a “shareholder dispute” giving rise to uncovered “intentional acts.” Plaintiffs assert that because T.I.E.’s denial letter failed to state specifically that the policy did not cover “economic losses,” T.I.E. waived its right to rely on Keating and its progeny in denying a duty to defend. In essence, we are asked to consider whether the doctrine of waiver may be invoked to create coverage for losses that the CGL policy by its terms did not cover. We address this issue, notwithstanding the antiwaiver clause in T.I.E.’s policy. That clause states the insurer does not waive rights or terms under the policy in the absence of an endorsement and focuses on the terms and conditions of the policy itself, rather than on the insurer’s claims practices. In sum, the clause does not affect the insured’s right to assert waiver of defenses in a denial letter.
Case law is clear that “ ‘[w]aiver is the intentional relinquishment of a known right after knowledge of the facts.’ [Citations.] The burden . . . is on the party claiming a waiver of a right to prove it by clear and convincing evidence that does not leave the matter to speculation, and ‘doubtful cases will be decided against a waiver’ [citation].” (City ofUkiah v. Fones (1962)
As T.I.E. observes, California courts have applied the general rule that waiver requires the insurer to intentionally relinquish its right to deny coverage and that a denial of coverage on one ground does not, absent clear and convincing evidence to suggest otherwise, impliedly waive grounds not stated in the denial. (State Farm Fire & Casualty Co. v. Jioras (1994) 24
Of the 33 sister states to consider the issue, 32 agree with the California rule. (See, e.g., Schiff Assoc, v. Flack (1980)
Notwithstanding the foregoing weight of authority, plaintiffs rely on the automatic waiver rule announced in dictum in McLaughlin v. Connecticut General Life Ins. Co. (N.D.Cal. 1983)
T.I.E. and Farmers assert McLaughlin v. Connecticut General Life Ins. Co., supra, 565 F.Supp.434, has been superseded by the Ninth Circuit decision in Intel Corp. v. Hartford Acc. & Indem. Co. (9th Cir. 1991)
"We agree with Intel, supra,
As the Intel court recognized, in the insurance context the terms “waiver” and “estoppel” are sometimes used interchangeably, even though estoppel requires proof of the insured’s detrimental reliance. (Intel, supra, 952 F.2d at p.1560.) Nonetheless, as the Intel court observed, “[w]aiver is an affirmative defense, for which the insured bears the burden of proof,” and “California courts will find waiver when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an
2. Estoppel
Plaintiffs also assert that notwithstanding our resolution of the McLaughlin waiver issue, T.I.E. should be estopped from denying a duty to defend on the basis of Keating and its progeny because the insurer anticipated the Keating decision at the time it denied a defense to the Amey action, but failed to state “economic loss” as a reason for denying a defense in its denial letter. This allegedly “wrongful conduct” by the insurer, plaintiffs claim, precluded plaintiffs from developing “facts [showing that] Amey’s alleged bodily injury arose from causes other than economic loss.”
As T.I.E. observes, however, proof of estoppel requires a showing of detrimental reliance by the injured party. (See State Farm Fire Casualty co. v. Jioras, supra, 24 Cal.App.4th at pp. 1627-1628; 11 Witkin, Summary of Cal. Law (9th ed. 1990) Equity, § 177, p. 859.) Plaintiffs do not show how they relied to their detriment on T.LE.’s grounds for denial. In the absence of any such proof, plaintiffs cannot show detrimental reliance on the grounds for denial of a defense.
In the present case, T.I.E.’s letter denying a defense and coverage on the ground that the Amey complaint represented nothing more than a “shareholder dispute” based on “intentional acts” unequivocally informed plaintiffs that the insurer was denying coverage under the terms of the policy. A “shareholder dispute” is essentially a “business dispute” and, in the context of the Amey allegations as set forth in the second amended complaint, would never give rise to the potential for coverage under T.LE.’s CGL policy. T.LE.’s denial letter thus adequately explained the factual basis for the insurer’s rejection of a defense. (See Cal. Code Regs., tit. 10, § 2695.2, subd. (z) [insurer’s denial of claim shall be in writing and shall provide factual basis of denial that is within the insurer’s knowledge at the time claim is
D. Bad Faith
We next consider whether plaintiffs may state causes of action for either breach of the implied covenant of good faith and fair dealing or violation of Insurance Code section 790.03 for unfair business practices, when the policy does not provide such coverage by its terms. We do so after recognizing that the present case was not final when we held that section 790.03 confers no private right of action for damages. (Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988)
In its original decision, the Court of Appeal noted at the beginning of its discussion that because a contractual obligation is the underpinning of a bad faith claim, such a claim cannot be maintained unless policy benefits are due under the contract. (See, e.g., Love v. Fire Ins. Exchange, supra,
When evaluating an insurer’s alleged violation of Insurance Code section 790.03, we are guided by the principles of first party coverage, and the fact that the insurer owes its insured an independent duty to process all claims submitted to it in a reasonable manner, and not to delay, to the insured’s prejudice, the ultimate decision to defend or indemnify. For example, where an insurer undertakes a defense under a reservation of rights, and then fails to pursue the defense in a reasonable manner, the insurer may be subject to penalties under section 790.03. (See, e.g., Travelers Ins. Co. v. Lesher (1986)
In the present case, however, we cannot say that the Court of Appeal erred in concluding neither T.I.E. nor Farmers violated Insurance
Conclusion
If an insurance policy provides no potential basis for coverage, the insurer is under no duty to defend an action against the insured. (Gray, supra,
Mosk, J., Arabian, J., Baxter, J., George, J., and Werdegar, J., concurred.
Insurance policies are, first and last, contracts. This court has repeatedly emphasized that by and large an insurance policy is interpreted no differently than any other contract, and that when the parties express their intent in unambiguous language in the policy, that intent governs. Although courts have evolved special rules for interpreting ambiguities in insurance policies, what these rules have in common is that they protect the insured. No special rules have developed that deny an insured coverage that an insurer has promised in unambiguous policy language.
Notes
Because the Court of Appeal believed that CGL policies were never intended to cover conduct that causes economic losses, it did not address (except for brief reference in a footnote) either the “named insured” or “employee liability” exclusions that may have provided additional grounds for denying a duty to defend the Amey action. We find it unnecessary to address alternative grounds for denying a duty to defend in this case.
Concurrence Opinion
In this case, the majority makes a sharp departure from the mainstream of insurance coverage law. Rather than hewing to the language of the insurance policy at issue in this case, the majority concludes that coverage within the ordinary and unambiguous meaning of the policy language does not exist.
Specifically, the majority holds that the liability insurance policy issued by defendant insurers excludes coverage for bodily injuries related to economic (i.e., intangible property) losses. The majority errs in doing so, for its conclusion finds no support in the language of the policy or in any other evidence of the mutual intent of defendant insurers and plaintiff insureds. The plain language of the policy covers liability for all bodily injuries caused by an “occurrence.” The policy defines “occurrence” as any “event, or series of events . . . proximately caused by an act or omission of the
Because the majority’s approach has no support in our law or in the language of the contract at issue here, I disagree with the majority’s reasoning. As I shall explain, however, I would nonetheless affirm the judgment of the Court of Appeal because there is an independent reason why defendant insurers properly denied coverage here: Plaintiff insureds sought coverage under the bodily injury coverage of the insurance policy for a lawsuit alleging they had intentionally caused someone to suffer emotional and physical distress; the insurance policy excludes coverage for bodily injuries expected or intended by the insureds, such as the intentional injuries alleged against the insureds; thus, there was no coverage under the policy for the lawsuit against plaintiff insureds.
I
Waller owned 60 percent of Marmac, Inc. (Marmac) and was its president; Amey owned 40 percent and was its vice-president. Waller sold his stock to Marmac employees Akers, Hendrix, He.pple, and Petersen (referred to hereafter collectively with Waller and Marmac as the insureds), who thereafter demoted and ultimately terminated Amey.
Amey sued the insureds. Amey alleged 12 causes of action in his amended complaint, including, as relevant here, one for the intentional infliction of emotional distress.
In his cause of action for emotional distress, Amey alleged that he suffered “humiliation, mental anguish, and emotional and physical distress” from the “conduct” of the individual insureds alleged in the other causes of action (for example, Waller’s sale of his stock to Akers, Hendrix, Hepple, and Petersen without notice to Amey and allegedly in breach of a contract to sell the stock to Amey; the alleged interference by Akers, Hendrix, Hepple, and Petersen with Amey’s contract with Waller for the sale of Waller’s stock; Amey’s demotion and subsequent termination in breach of his employment contract with Marmac; Akers, Hendrix, Hepple, and Petersen’s bad faith abuse of their positions as controlling shareholders and directors to engage in self-dealing and to deny Amey a voice in corporate affairs). Amey alleged that the individual insureds’ conduct had been “intentional and malicious and . . . done for the purpose of causing Amey . . . emotional
The insureds were insured under a policy issued by Truck Insurance Exchange through Farmers Insurance Exchange (collectively Truck). The insureds tendered their defense to Truck, which rejected it on the ground that Amey’s causes of action were not covered under the policy. The insureds sued Truck for bad faith denial of its duty to defend, contending that Amey’s cause of action for emotional distress was covered under the Truck policy. The insureds also alleged that Truck had breached its duties under Insurance Code section 790.03, subdivision (h), which prohibits various acts and practices by insurers in processing and settling the claims of their insureds. In a bifurcated proceeding, the trial court held that Amey’s cause of action for emotional distress was covered under the policy and, accordingly, Truck had a duty to defend; a jury then determined that Truck had also breached its duties under Insurance Code section 790.03, subdivision (h).
The Court of Appeal reversed, holding that the Truck policy did not cover bodily injury related to economic loss, and holding that there could be no cause of action under Insurance Code section 790.03, subdivision (h) because there was no coverage under the Truck policy.
II
Whether Truck had a duty to defend turns on whether the relevant facts or pleadings give rise to any potential for coverage under the policy. (Gray v. Zurich Insurance Co. (1966)
In La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994)
Application of these principles yields a straightforward resolution of this case. No party has put forward extrinsic evidence bearing on the interpretation of the policy. Therefore, it is solely the language of the policy that determines whether coverage exists.
The coverage clause of the policy obligates the insurer to “pay all damages which the insured becomes legally obligated to pay because of [cf0 (C) bodily injury to any person . . . [H . . . P3D • • • [H • • • caused by an occurrence.” (Italics added.) The question of coverage therefore turns on whether there was “bodily injury” caused by an “occurrence.”
Did Amey allege a “bodily injury” within the meaning of the policy? The policy defines “bodily injury” as “bodily injury, sickness, or disease.” Amey alleged in his complaint that he had suffered both emotional and physical distress as a result of the insureds’ conduct. At his deposition, Amey testified that the insureds’ conduct had caused him to suffer headaches, back pains, and rashes.
Most of the courts that have addressed the issue have held that any physical manifestations accompanying emotional distress are “bodily injuries” as that term is used in insurance policies. (Aim Ins. Co. v. Culcasi (1991)
Were Amey’s “bodily injuries” caused by an “occurrence”? The policy defines “occurrence” to mean “an event, or series of events, including injurious exposure to conditions, proximately caused by an act or omission of the insured regardless of the number of persons, vehicles or objects affected by such act or omission which results, during the policy period, in bodily injury or property damage, neither expected nor intended from the standpoint of the insured.” (Italics added.) Stated otherwise, the elements of an “occurrence” can be broken down into (1) an event or series of events (2) proximately caused by the insured (3) resulting in bodily injury or property damage, (4) with the injury or damage being neither expected nor intended.
The majority and I agree on the elements of the “occurrence” definition. (See maj. opn., ante, at p. 20 [“to demonstrate a potential for coverage under [Truck’s] policy, an insured must show the claim he must defend is an alleged act or omission that caused bodily injury or tangible property damage (as defined by the policy) to the third party, and that the alleged injury was neither expected nor intended by the insured”].) The majority, however, never applies these elements to the facts of this case to determine whether there was a potential for coverage of Amey’s claims against the insureds. Accordingly, I do so here.
The first element of the definition of “occurrence” requires an “event, or series of events.”
The third element of “occurrence” requires, as relevant here, that the events result in bodily injury. As I have already explained, to the extent Amey suffered physical manifestations of his emotional distress, I assume the events resulted in bodily injury.
The fourth element of the definition of “occurrence” requires that the bodily injury be “neither expected nor intended from the standpoint of the insured.” It is on this point that the insureds’ claim for coverage fails. The intentional infliction of emotional distress that Amey alleged is not an occurrence within the policy’s definition because the tort requires that the insured either intend or expect that the emotional distress (and any accompanying physical manifestations) occur. “The tort calls for intentional, or at least reckless conduct—conduct intended to inflict injury or engaged in with the realization that injury will result.” (Davidson v. City of Westminster (1982)
Any injury caused by the insured that is calculated (i.e., intended), or which the insured knew was substantially certain to result from the insured’s conduct, however, is an injury that the insured “expected or intended.” (Shell Oil Co. v. Winterthur Swiss Ins. Co., supra, 12 Cal.App.4th at pp. 745-748 [insured “expected or intended” a result if the insured intended the result or believed the result was substantially certain or highly likely to occur].) Because the intentional infliction of emotional distress is an injury that is either “calculated” by the insured or that the insured knew was “substantially] certain[]” to result (Christensen v. Superior Court, supra,
Ill
The majority, however, ignores the controlling language of the policy that I have just discussed. Instead, the majority manufactures an exclusion of bodily injuries “related to” economic losses that has no basis in the policy language or in any other indicia of the parties’ intent, and on that ground concludes there was no potential for coverage of Amey’s lawsuit against the insureds. The majority asserts that because the events underlying Amey’s lawsuit caused uncovered “economic” (i.e., intangible property) losses to Amey, there can be no coverage for any bodily injuries to Amey that were
On what basis does the majority reach this conclusion? Instead of closely analyzing the policy language to determine whether coverage exists, the majority engages in a lengthy recitation of three cases on which the Court of Appeal relied, and then in a conclusory paragraph asserts that “CGL policies do not provide coverage for economic losses that cause emotional distress. . . . These policies were never intended to cover emotional distress damages that flow from an uncovered ‘occurrence,’ ...” (Maj. opn., ante, at p. 23.) Accordingly, the majority concludes that there was no potential for coverage because “[a] 11 allegations in the Amey complaint were related to Amey’s asserted economic loss as a Marmac shareholder.” (Ibid.)
The majority’s conclusion is wrong. The majority’s exclusion of all bodily injuries “related to” an economic loss is an unsupportable judicial rewriting of the insurance contract at issue here. The majority does not and cannot justify its sweeping statements by anything found in the language of the policy. Contrary to the majority’s conclusion, nothing in the language of the insureds’ policy with Truck excludes coverage for bodily injuries that are “related to” (maj. opn., ante, at p. 23) economic losses. The Truck policy’s definition of “bodily injury” does not exclude injuries that are caused by or related to economic losses. It covers all “bodily injury, sickness or disease,” regardless of the cause.
Likewise, the Truck policy’s definition of “occurrence” broadly encompasses any “event, or series of events,” that “results in . . . bodily injury,” whether or not one of the events in the chain of causation also causes a concurrent economic loss or is itself an economic loss.
Thus, there is nothing in the policy language that limits “occurrence,” as the majority does, to “an event based on a noneconomic act” (maj. opn., ante, at p. 26). Rather, as I set forth earlier, the policy defines an “occurrence” to include events that result in bodily injury. An occurrence does not become a nonoccurrence simply because the event causes both bodily injury and economic loss.
The coverage clause of the policy obligates the insurer to “pay all damages which the insured becomes legally obligated to pay because of [<]0 (C) bodily injury to any person, and [U . . . [U (E) damage to property . . . [1 to which this insurance applies, caused by an occurrence.” (Italics added.) The bodily injury coverage (which the policy refers to as “Coverage C”) is independent of the property damage coverage (which the policy refers to as “Coverage E”). Coverage E and coverage C, for example, are subject to different exclusions, can be separately purchased, and can be subject to different liability limits. The coverage clause does not require that for a bodily injury to be covered under coverage C it must be caused by property damage covered under coverage E. Likewise, under the policy’s definition of occurrence, it is irrelevant whether the event resulting in bodily injury under coverage C takes the form of property loss that is not covered under coverage E; all that is necessary is that the event, whatever its nature, “result[] in . . . bodily injury.”
The majority is therefore wrong in its assertion that coverage for bodily injury under coverage C is limited to events that also cause property damage that is covered under coverage E. (“[T]he occurrence or act leading to coverage [for bodily injury under coverage C] must be an injury to tangible property [i.e., property damage covered under coverage E], not to one’s economic interest.” Maj. opn., ante, at p. 26.) The Truck policy independently covers either property damage or bodily injury resulting from an event or series of events proximately caused by an insured, regardless of the nature of the intermediate events in the chain of causation.
The majority maintains nonetheless that it was the “intent of the parties” to exclude from coverage bodily injuries related to economic losses. (Maj. opn., ante, at p. 28.) But the majority offers no evidence that the parties here mutually held this supposed intent. What the majority calls the “intent” of the parties is actually its own opinion of how insurance policies should be drafted. It is not this court’s function, however, to draft or redraft insurance policies. The true intent of the parties in this case is the meaning to be found in the language of the policy—nothing more, nothing less. As the analysis
Nor are the three cases relied on by the majority and by the Court of Appeal persuasive. Like the majority, those decisions failed to ground their conclusions in the contractual language before them. In the first of those cases, Chatton v. National Union Fire Ins. Co. (1992)
The Court of Appeal in Chatton based its conclusion that the policy before it excluded coverage for bodily injuries caused by intangible property loss on its assertion that “the ‘bodily injury’ clause of the CGL policy . . . incorporated coverage for loss or destruction of tangible property as well.” (Chatton v. National Union Fire Ins. Co., supra,
In addition to being contrary to the language of the Truck policy, the majority’s adoption of Chatton's approach is at odds with this court’s
Even if the decisions in Chatton v. National Union Fire Ins. Co., supra,
Nor can the majority’s holding be justified by its assertion that the exclusion of bodily injury related to economic loss conforms to the “reasonable expectations” of the insureds. The reasonable expectations doctrine
The majority creates a blanket rule that no coverage exists under the bodily injury liability provisions of an insurance policy if the bodily injury is related to property damage not covered by the policy. That rule will restrict the bodily injury coverage provided by any policy that, like the Truck policy here, on its face covers bodily injury independent of whether or not any related property damage is covered by the policy. For example, assume a policy that provides coverage for bodily injuries, but not property damage, caused by the insured. The majority’s reasoning would deny an insured coverage for any bodily injury caused by property damage (e.g., if the insured’s car strikes and damages a tree that falls and injures someone) solely because there is no coverage for the property damage that is the immediate cause of the bodily injury.
Conclusion
The ordinary meaning of the pertinent Truck policy language covers bodily injuries without regard for the nature of the event causing the bodily injury. The policy therefore covers bodily injuries that are caused by economic losses or, as here, are caused by an event that also causes an economic loss. Had Truck wanted to exclude coverage for bodily injuries related to economic loss, it could, as the drafter of the policy at issue in this case, have so provided. It is not the proper role of this court to manufacture coverage
As I have previously explained, however, Amey’s complaint did not allege an “occurrence” within the meaning of the Truck policy for a far different reason. The policy defines an “occurrence” as an event resulting in bodily injury neither expected nor intended by the insured. Amey alleged that the emotional and physical distress that he suffered was intended by the insureds. Because he alleged that the insureds intended to cause him those injuries, those injuries were not caused by an “occurrence” within the policy’s definition of that term. It is on that ground that I would affirm the judgment of the Court of Appeal.
Respondents’ petition for a rehearing was denied October 26, 1995, and the opinion was modified to read as printed above. Kennard, J., was of the opinion that the petition should be granted.
The insureds renewed their tender of defense on the basis of Amey’s deposition testimony; Truck never responded.
The requirement of an “event” that causes injury is a departure in Truck’s policy from the language of the current standard commercial general liability (CGL) policy drafted by the Insurance Services Office (an insurance industry trade group). The standard CGL policy requires that an “accident,” not an “event,” cause the injury. (Insurance Services Office, Commercial General Liability Coverage Form (eff. Jan. 1, 1986), reprinted in 3 Cal. Insurance Law and Practice (1995) Business General Liability Policies, appen. C.) The Truck policy represents a broadening of coverage in that the cause of injury no longer need be sudden and fortuitous, as it must be under an “accident” occurrence clause. (Compare United Pacific Ins. Co. v. McGuire Co. (1991)
In this respect, the majority is mistaken in describing the Truck policy as a “standard” CGL policy. (See maj. opn., ante, at p. 19.)
The insureds do not contend that, although Amey’s complaint was limited to the intentional infliction of emotional distress, he might have ultimately recovered damages for emotional and physical distress on a theory that those injuries were negligently inflicted and that therefore there was a potential for coverage. (See Gray v. Zurich Insurance Co., supra,
Truck denied coverage to the insureds on the ground that “Intentional Acts are not covered . . . .” Although inartfully phrased (because it focuses on intentional acts rather than intentional damage or injury), it seems clear that the purpose of Truck’s letter was to invoke the “neither expected nor intended” language of the “occurrence” definition. Because I conclude that there was no potential for coverage for the same reason, I find it unnecessary to address the waiver and estoppel arguments addressed in section C of the majority opinion. Likewise, I do not have occasion to address the retroactivity and legal uncertainty issues considered by the majority. (Maj. opn., ante, at pp. 24-26.) Nor is it necessary for me to address the other alternative grounds for denying coverage put forward by Truck. (See maj. opn., ante, at p. 20, fn. 1.)
I concur in the majority’s decision that in the absence of any potential for coverage the insureds do not have a cause of action against Truck for its alleged violation of its duties under Insurance Code section 790.03, subdivision (h) with respect to its processing and resolution of the insureds’ claim for coverage.
In this part, I put aside for the moment the “neither expected nor intended” portion of the Truck policy’s definition of “occurrence” that I discussed previously in part II, as the majority does not base its exclusion of bodily injuries related to economic losses on that language.
The majority’s conclusion is also contrary to its acknowledgment elsewhere that “the CGL policy provides coverage for ‘occurrences’ that cause bodily injury or tangible property losses.” (Maj. opn., ante, at p. 23, italics added.)
Nor does Allstate Ins. Co. v. Interbank Financial Services (1989)
Moreover, Amey claimed the insureds caused him emotional and physical distress by conduct that did not cause any accompanying economic loss. Amey testified at his deposition in his lawsuit against the insureds that the insureds had humiliated him by cutting his office telephone lines, packing his belongings and putting them out on the sidewalk, and humiliating him in front of a client. None of these acts caused economic loss to Amey. As I have noted
This case presents other distinctions as well from Chatton v. National Union Fire Ins. Co., supra,